New FTSE index would better reflect UK economy

A rival is planned for the FTSE 100 which critics say is dominated by multinationals

Mark Leftly
Tuesday 08 May 2012 00:54

The FTSE Group is looking at introducing a share index to rival the FTSE 100 that would measure the performance purely of companies that contribute heavily to the British economy.

The Canary Wharf-based provider of stock indices is considering an index of firms that derive at least a significant minority of their work from the UK.

Critics say that the FTSE, launched in January 1984 with a base level of 1000, has lost its connection to its home market. It is now dominated by giant mining companies and others that are based largely overseas, rather than by stalwarts of British industry. As such, say the critics, it is telling investors and the wider public more about the future price of steel than it is about prospects for corporate profits and the UK economy.

The new index would exclude those big mining companies and eastern European ventures that have raised cash in London, as most of their income comes from overseas. Parties that have pitched the idea, which the group could introduce in six to nine months, believe this would give a better picture of how the UK economy is performing.

It is also hoped that fund managers would be tempted to raise vehiclesthat solely invest in the index. These "UK economy" funds would be popular among politicians looking to show the electorate that a successful UK plc improves the nation's finances.

Although the index would not replace the All-Share it would act as a "complement", said an industry source. However, he added that he felt the FTSE should go further, including only the proportion of a company that actually operates in the UK in the index.

He said: "The thing is, the FTSE 100 could be up, but this is so international that it might have nothing to do with how the UK is faring. It could simply be skewed by gold or oil prices being up, increasing the valuations of a few big multinationals."

However, the FTSE is unlikely to simply take a proportion of a company, as this could be potentially quite complicated. There could also be arguments over what does or doesn't constitute work within the UK's boundaries.

A FTSE source conceded that there had been "lots of interest in an index that has a broader coverage of – that is more aligned with – the UK economy". The source added that a final decision on pressing ahead with the index, a reasonably similar version of which FTSE has just introduced in the US, had not yet been made. A FTSE spokeswoman said: "There is interest in this, but we haven't yet got any firm plans or time frames at the moment."

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