The FTSE 100 is at record highs – so why is London’s stock market dying?
5 Mins Read
Illustration: Man scratching his head looking at the Bank of England
The FTSE 100 has started the year with a bang, hitting its second all-time high of 2025 on Thursday morning, surging past 8,700 points at the open. It had broken its previous record high just last month, closing above 8,500 points for the first time in January.
This follows an undeniably strong year for the index of Britain’s biggest companies, which gained about 6pc in 2024 and reached a previous record high of 8,445 points last May.
But the recent rise may have left some investors scratching their heads – if the FTSE 100 has hit record-breaking highs, then why do experts say the London stock market is trapped in a “doom loop”?
First, the FTSE 100 is no barometer for the UK economy. In fact, there is little correlation between stock market movements and domestic GDP, says Jason Hollands, of investment platform Bestinvest.
“That is especially true of the FTSE 100, which is comprised of highly international companies.”
Businesses in the index derive about 75pc of their earnings from overseas – mostly in US dollars.
The currency soared in the wake of Trump’s victory. In September last year, £1 fetched $1.34, but the exchange rate has since fallen to $1.23. While this is bad news for British travellers, it means London’s internationally focused businesses get a welcome boost to their earnings.
Mr Hollands says: “Far from being a vote of confidence in Rachel Reeves’s stewardship of the economy or the UK outlook, the bounce in the FTSE 100 index is in large part a reflection of the weakening of the pound and soaring dollar as capital flows away from the UK to the US, concluding that the growth outlook is much stronger on the other side of the Atlantic pond and Trump’s reflationary agenda will keep US rates higher for longer.”
Henry Norton, an investment manager at private bank Arbuthnot Latham, says there is another reason for the FTSE 100’s recent rise: inflation.
“Beneath the headlines, inflation has been the biggest driver of nominal earnings growth. Adjusted for inflation, both FTSE 100 earnings and price levels remain below pre-2008 and even pre-Covid levels. Clearly, this paints a far less rosy picture for UK corporates.”
Last year, 88 firms delisted or moved their primary listing from the main market, the biggest exodus since the financial crisis – only 18 took their place. There are now fewer than 1,700 companies on the London Stock Exchange, down from nearly 2,500 a decade ago.
However, the falling number of listings is not unique to Britain, but part of a global slump.
In the US, the number of firms listed on the stock market has dropped to about 4,600, down from an all-time high of 8,090 in 1996, according to World Bank data.
Nevertheless, experts argue the decline of the stock market is more marked in the UK than in other countries.
Although the FTSE 100 hit new records last year, it still underperformed most of its peers. As a result, investors have shunned UK equity funds, withdrawing over £9.5bn in 2024, the tenth year of consecutive withdrawals, according to global funds network Calastone.
Mr Norton says: “The perceived ‘UK discount’ on valuations has led to a wave of delistings and departures. From mid-caps to household names, the market’s depth and diversity has reduced.”
Some say this has created a “doom loop”. Firms refrain from listing in London over concerns about low valuations and reduced liquidity, which in turn contributes to the stock market’s underperformance and leads to investor outflows.
The Government is determined to attract more money back into the market. The Conservatives had proposed incentivising savers to buy UK stocks with the introduction of a tax-free Great British Isa, but the plans were scrapped by Labour in the most recent Budget.
Chancellor Rachel Reeves hopes that by consolidating pensions and boosting their allocation to the UK she can help reverse the stock market’s decline.
Since the 1990s, pension funds have dramatically curbed their exposure to UK equities. This shift – the result of tighter regulation pushing pension funds into bonds – is thought to have contributed to the underperformance of British stocks.
Today, less than 5pc of UK pension assets are held in domestic stocks, compared to the global average of 10pc, according to think tank New Financial.
Some are doubtful the Chancellor’s plan will truly revive London’s stock market. A key reason the FTSE 100 has failed to keep up with other stock market indices is its composition, with the index primarily tilted towards “value” stocks in banking, mining and oil and gas. It lacks major technology firms that have boosted the US stock market.
On a total return basis, the index has lagged the S&P 500 by over 24pc over the past five years.
The demise of the London stock market partly reflects the growing dominance of the US. The London stock market used to be the biggest in the world, but today it comprises just 3.7pc of global stock markets, while the US makes up 60pc, according to investment bank UBS.
Yet Mr Hollands says there is reason for investors to remain optimistic.
“The UK is a service-led economy, with a relatively modest manufacturing basis, and to some extent this means it is less vulnerable to US tariffs on imports than the likes of Germany, with its huge auto sector, and China.
“In relative terms, the companies in the FTSE 100 could be seen as a more defensive play amid heightened worries about global trade wars.”
