Strong FTSE, strong UK? Not necessarily: CNBC’s UK Exchange newsletter

This report is from this week’s CNBC’s UK Exchange newsletter by Ian King. Like what you see? You can subscribe here.

Ian Holloway, one of the most eccentric managers in British football, is famous for his idioms and sayings.

One of his most celebrated came when, in May 2004, his Queens Park Rangers team had secured promotion to England’s second tier: “They say every dog has his day — and today is Woof Day. Today I just want to bark.”

Lately, the FTSE-100, long a dog among equity indices, has been enjoying its very own Woof Day. Britain’s premier stock index is up 11% so far this year and has this month achieved a couple of notable benchmarks.

The index, launched on Jan. 3, 1984, with a value of 1,000, hit the 9,000 milestone for the first time on July 15 and followed that up on Thursday last week by hitting the latest in a string of all-time closing highs of 9,138.37.

It has taken just two years to go from 8,000 to 9,000 compared with the seven painstaking years it took to rise from 7,000 to 8,000.

The Footsie’s year-to-date performance is one of the best in global stock markets. It has outperformed other well-known benchmarks such as the S&P 500, the Nikkei 225 and the CAC-40, with the DAX-40 in Germany one of the few peers to have eclipsed it. This outperformance of the S&P 500, should it be sustained, is pretty rare.

The Footsie has only outdone the U.S. benchmark twice over the course of a year — in 2016 and 2022 — since the eruption of the global financial crisis 18 years ago. That reflects not only the dynamism and growth potential of the S&P’s constituents, chiefly the tech sector, but also the Footsie’s over-weighting in what are perceived by many investors as stodgier, defensive sectors, such as financials and consumer staples, and highly cyclical sectors such as energy and mining.

Accordingly, even after the recent performance, it is still sitting on a price/earnings multiple only just above its long-term average of 15 whereas the S&P — which, we should not forget, also hit a record last week — still trades on a multiple of almost 30.

Those ratings reflect the very different factors that have driven returns. While capital appreciation has driven just over two-thirds of the S&P’s total return over the years, roughly half of the Footsie’s total return has come from dividends.

The attachment of U.K. investors to dividends, something regularly disparaged as ‘coupon clipping’ down the years, is pronounced.

The Footsie’s solid showing last week was for similar reasons to the rallies elsewhere: relief at the U.S. achieving a deal with Japan over tariffs and optimism that something similar can be achieved with the European Union, although the latter has proved disappointing, at least so far as European equity markets have been concerned.

But there have been other, broader factors also at play during 2025.

The Footsie’s heavy gearing toward defensive stocks has played well this year as investors seek a shelter from Trump-induced volatility. There is also a lot of anecdotal evidence that it has benefited from some investors taking their money outside the U.S. — something that was particularly evident in the first four months of the year and summed up in the expression, which first appeared in the Wall Street Journal on May 19, the ‘ABUSA (Anywhere But USA) trade’.

And there have been important boosts for individual sectors, most notably defense, following commitments from a number of Western governments to raise defense spending.

Rolls-Royce, the aircraft engine manufacturer which also has a substantial defense business, has seen its shares rise by 75% so far this year. BAE Systems, the U.K.’s biggest defense contractor, is up 59% since the beginning of the year. The pair are now respectively the sixth and 11th biggest companies in the index.

Specific elements on the day the Footsie hit its most recent record last week included strong earnings updates from a host of constituents, most notably Reckitt, the household products group; Howden Joinery, the kitchen and joinery supplier and Lloyds Banking Group.

Even BT, a serial disappointment, rose sharply after quarterly results proved no worse than expected. That day also saw a decline in the pound — a factor that often benefits the index because Footsie constituents derive four-fifths of their earnings overseas, mainly in U.S. dollars and euros.

This was a point not greatly appreciated by some investors until the U.K. voted to leave the EU on June 23, 2016, and the pound fell by 10% against the greenback in a matter of hours.

Initially, the Footsie fell sharply, in line with other U.K. assets. However, as realization dawned that a weaker pound translates into higher earnings from overseas revenues, the index rallied and, a week later, it was some 2.6% higher than it had been before the referendum.

And this, in turn, leads to probably the most significant fact lost on many ordinary British investors. The Footsie is commonly perceived to be a barometer of U.K. economic — and, certainly, corporate — health.

The truth is that it is not in the slightest bit reflective of the U.K. economy. Yes, there are some companies — BT and Lloyds being good examples — that derive the majority of their earnings in the U.K.

However, the Footsie is also packed with companies that do little or no business in the U.K., such as Antofagasta, a Chilean copper miner; Fresnillo, a Mexican silver miner; Mondi, a global leader in paper and packaging with 100 production sites around the world but none in Britain; and Ashtead Group, a plant and tool hire company that derives more than 90% of its earnings from the U.S., where it trades under the name Sunbelt Rentals — the name it will take when it moves its primary stock listing early in 2026.

Even a number of businesses traditionally seen as quintessentially British to the extent that they have (or have had) the word in their company moniker, such as BP, BAE Systems and British American Tobacco, derive the majority of their earnings outside the U.K.

Of the 20 biggest companies in the Footsie, only Lloyds Banking Group and NatWest Group, another lender, make the majority of their earnings in the U.K.

It did not always used to be this way.

At its launch, 41 years ago, the Footsie was full of companies that made the majority, if not all, of their sales and profits in the U.K., including a clutch of domestically oriented brewing, pub and hotel operators in Scottish & Newcastle, Bass, Whitbread, Grand Metropolitan and Allied Lyons; two flat pack furniture and joinery companies in Magnet & Southerns and MFI; and a whole host of then U.K.-focused retailers, including Burton Group, House of Fraser, Sears (no relation to the U.S. retailer of the same name), British Home Stores, Marks & Spencer and Great Universal Stores.

With globalization yet to take off — this was, of course, before the fall of the Berlin Wall — even those financial services companies in the Footsie were largely domestically focused, including the insurers Commercial Union and General Accident (now both part of Aviva Group), Prudential and Sun Life and lenders such as Royal Bank of Scotland, Midland Bank (now part of HSBC) and Barclays, which was yet to embark on its push into the wholesale and investment banking activities with which it is most closely associated these days.

At its birth, the Footsie contained only a handful of companies that could be regarded as genuinely international in scope, including a couple which dated back to the old British Empire: Consolidated Gold Fields, founded in South Africa in 1887 by the imperialist Cecil Rhodes and Harrisons & Crosfield, now the specialty chemicals company Elementis but then best known for owning Malaysian rubber plantations.

Then came globalization and, with it down the years, a string of IPOs of foreign companies, particularly from South Africa, wishing to tap into London’s more liquid capital markets.

In being so internationally focused, the Footsie is no different from the DAX-40, whose members derive around four-fifths of their earnings from outside Germany or the CAC-40, whose constituents make around three-quarters of their earnings from outside France.

But it certainly should not be taken as a barometer of corporate Britain’s health — however good it makes some of us feel on days when it hits new highs.

— Ian King

Natwest Chief Financial Officer Katie Murray discusses the British bank’s earnings, its share buyback and the current U.K. economic picture.

CNBC’s Silvia Amaro reports on European leaders voicing their frustrations with the terms of the U.S.-EU trade deal and the pressure it will put on the bloc’s economy.

Storm Uru, fund manager at Liontrust Asset Management, discusses recent tech earnings and explains some of the company’s contrarian calls on the Magnificent Seven.

— Sophie Kiderlin

The EU-U.S. trade deal could have one unexpected winner: The UK. The European Union is facing a higher U.S. tariff rate than the U.K., which could put the country at an advantage compared to the bloc.

Barclays second-quarter profit beats estimates as investment banking revenues swell. The British lender also announced a £1 billion ($1.33 billion) share buyback, while market volatility boosted investment banking revenues.

UK pushes Apple and Google for mobile changes to curb market power. The U.K.’s Competition and Markets authority proposed designating the two companies as having “strategic market status.”

— Sophie Kiderlin

U.K. stocks have largely maintained their upward momentum, with the FTSE 100 remaining above the 9,000 point threshold it surpassed for the first time last week. Gains over the last week totaled around 0.6% as of Tuesday, though this lagged the broader Stoxx 600 index up 1.4%.

The British pound on Monday logged its biggest session gain against the euro since April, climbing 0.66%, as investors assessed the EU-U.S. trade deal.

ING analysts said that while some would attribute the move to the U.K.’s relatively better deal with the White House, there also appeared to be some short-term unwinding of the long euro-sterling trade that has been popular this summer.