FTSE 100: Why its record breaking high is not something to celebrate

In dollar terms, the FTSE 100 is one of the worst performing of the major indices over the past year

the Bank of England held interest rates steady at its regular policy meeting, but indicated that they may rise again soon (Getty)

The UK's bluechip stock index has chalked up a fresh record close every day of the year so far, but if it weren't for the tumbling pound, the benchmark's trajectory would be quite unremarkable.

On Wednesday, the FTSE 100 ended the session up 0.2 per cent, continuing its longest winning streak in years and extending its lengthiest run of record-breaking days ever.

It's risen close to 2 per cent so far in 2017, extending a ferocious rally since the shock June Brexit vote triggered a dramatic slump in the pound. Over that period, it's one of Europe's best performing indexes.

But the FTSE 100 is priced in pound sterling, which means that the rally itself cannot be attributed to the performance of the individual companies in it.

Because of the pound's nose-dive, the income that internationally-exposed companies generate overseas becomes worth more when brought back home.

Around two thirds of FTSE 100 revenue is generated overseas.

According to Chris Beauchamp, a senior market analyst at spread betting company IG, the FTSE 100 actually dropped more than 4 per cent last year when calculated in US dollar terms.

He says that it's 25 per cent off its 2014 high and is currently back at levels last seen in October.

While the index may be up around 22 per cent in sterling terms since the Brexit vote, it's only gained around 12 per cent when calculated in dollar terms, according to Beauchamp.

"In dollar terms, the FTSE 100 is one of the worst performing of the major indices over the past year," says Matthew Tillett, UK equities portfolio manager at Allianz Global Investors.

He says that the FTSE 100's relative underperformance over the longer term is because of how it has become dominated by certain sectors and stocks.

Oil and gas companies, which in recent years have been sent on a rollercoaster ride as a result of volatility in commodity prices, account for around 15 per cent of the market capitalisation of the whole index meaning that moves in those stocks will have a disproportionately high impact on the whole index.

Bank stocks, which also tend to underperform when volatility in markets rises, make up around 13 per cent of the whole indexes capitalisation.