How Falling Commodity Prices have Rebalanced the FTSE 100

The commodity crash and ongoing hunt for yield have radically altered the nature of the FTSE 100, turning it into a much more balanced bet

Hortense Bioy, CFA 13 April, 2016 | 12:10PM
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The FTSE 100 has been a notable laggard over the past five years, underperforming the S&P 500, its US large-cap equivalent, as well as the UK mid & small cap FTSE 250 by 6% and 6.2% in annualised terms, respectively.

Traditional indices constantly evolve through time according to different fundamental drivers

Most of this underperformance can be easily explained by the FTSE 100’s heavy concentration in the resources sector, energy and mining companies, which post-financial crisis grew to become the index’s top sector, with a weighting of over 30%, supported by the voracious appetite of emerging markets. Companies like Royal Dutch Shell (RDSB) and Rio Tinto (RIO) have since been hit hard by a slowdown in China, compounded by the collapse in the price of oil and other commodities. As a result of their deflating valuations, energy and basic material stocks account today for less than 13% and 6% of the index value, respectively.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is global head of sustainability research at Morningstar

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