Time really does fly in finance – it is hard to believe that the FTSE 100 is 40-years-old this month.
Why is it called the FTSE 100? Well, when the index was originally created on January 3 1984 by the Financial Times Stock Exchange, this is how many companies a UK investor could see on a screen. Who would have predicted that it would go on to become one of the most world-renowned benchmarks.
As an active contributor in the global indexing industry (currently managing the index suite of SIX) it is amazing to see in the subsequent years how the global indices business has grown exponentially, with numerous providers now supplying in-depth information about the health of the capital markets.
When looking back on the past four decades, geopolitical turmoil and a certain 2008 financial crisis spring to mind as the main drivers of market volatility that have influenced the performance of an index.
Less liquid stocks have also posed challenges for index tracking, especially during the various market downturns. This issue has become more pronounced with changes in market structure, as well as the inclusion of smaller companies in indices.
There have also been numerous structural challenges – a topic often forgotten that index methodologies are not static but need and should be adapted to market changes.
Determining the methodology how companies are selected for an index is an art and now depends on various criteria to ensure market representativeness, sufficient liquidity and continuity.
Predicting the future of financial indices over the next 40 years involves a high degree of uncertainty.For instance, there have been several changes in inclusion/exclusion rules that have impacted the characteristics of the FTSE over the years, in connection with the listing of several large foreign companies.
There have been numerous milestones in the time since the FTSE’s launch – with data taking centre stage across the wider index space. Issues relating to data quality, availability, and the timeliness of financial reporting have affected the integrity of index values.
As a result, there has been an increasing need for reliable and timely data for accurate index calculations.
In addition to the data needs of today’s financial institutions, there has been an evolution of further innovative indices and financial products linked to indices.
The launch of the FTSE 100 in the UK kick-started the development of indices in other financial centres, and while the FTSE 100 turns 40 other indices followed a few years later like the SMI, the DAX and then the IBEX 35 that celebrated their 30th birthday in the past years.
Key milestones are the listing of index futures and options and later the establishment of exchange-traded funds. The success of ETFs accelerated especially after 2008 and I cannot imagine a world today without them.
But with competition fiercer for company listing than ever as businesses all over the world deliberate where they should list in, the future is a bit unknown.
As indices reflect specific market segments, the future of the FTSE, and other typical country indices, very much depends on how stock exchanges and listing places continue to evolve or consolidate.
Therefore, predicting the future of financial indices over the next 40 years involves a high degree of uncertainty, as it depends on a plethora of factors including economic conditions, technological advancements, geopolitical events, and regulatory changes.
The continued integration of global markets and the rise of emerging economies may result in increased representation of companies from these regions in client portfolios.
Investors may continue to diversify their portfolios by seeking opportunities in fast-growing markets and continue considering numerous country indices as their core investment.
Alternatively, if these new companies fulfil the listing requirements at specific venue, they may shape the traditional indices.
The FTSE’s fate, and that of its counterparts, hinges on the adaptability of stock exchanges, listing places, and indices themselves.Then there is the growing emphasis on sustainability and responsible investing. Evolving regulatory landscapes around sustainable finance will impact the composition and calculation methodologies of financial indices.
Financial indices will need to adapt to incorporate environmental, social, and governance criteria, and investors may prioritise companies that demonstrate strong ESG credentials.
The sector is amidst a dynamic interplay of global competition, technological advancements, and evolving regulatory landscapes. The integration of emerging economies and the rising emphasis on sustainability signal potential shifts in the composition and calculation methodologies of indices.
The FTSE’s fate, and that of its counterparts, hinges on the adaptability of stock exchanges, listing places, and indices themselves.
Navigating the next 40 years requires a keen awareness of economic conditions, geopolitical events, and the ever-changing dynamics of the financial world.
As investors continue to seek opportunities, the resilience and adaptability of financial indices will undoubtedly play a pivotal role in shaping the future of global markets.
Christian Bahr is head of index services at SIX
