Finance 11 July 2018

Why growing FTSE 100 strength is good news for small business investment

The financial pages have been heralding the best quarter in five years for the FTSE 100 Index

As companies listed on London’s stock exchange register the best growth since early 2013, strong performance of the FTSE 100 Index could mean greater investment opportunities for small businesses.

Towards the end of last week, the financial pages were heralding the best quarter in five years for the FTSE 100 Index, and it ended the month with a rise of 21.3 to officially close for the quarter on 7,636.93. That represented an eight percent gain over the entire quarter, comfortably the strongest since the first quarter of 2013.

This came in spite of June itself seeing the index fall by half a percentage point amid global trade tensions sparked by the sabre rattling taking place in the USA and China. Clearly, this represents welcome news for those who choose to invest in the FTSE 100, but it is also a good sign for smaller businesses.

Good news for investors

The short-term numbers might look a little worrying, with the FTSE index taking a further dip as trading got underway on Monday, but the big picture perspective suggests that those following FTSE 100 index trading strategies have got the right idea when it comes to the long term.

Holding an index tracking fund is often compared to spread betting, and while some see the parallel with gambling as something that might put them on their guard, it is a far more appealing option that the obvious alternative of holding shares in individual companies on the FTSE 100.

Recent events have shown that when it comes to the latter option, nothing is truly safe anymore. Firms like Centrica or Marks & Spencer are struggling with their own demons in relation to dwindling sales and well-publicised pension deficits. Even the giants like Royal Dutch Shell, HSBC or Legal and General Group can be hit hard by external factors such as volatile oil prices or even the fallout from Brexit.

A tracking fund spreads the risk and allows you to balance the troughs in one sector with peaks in another. And as far as long-term prospects go, it is worth keeping in mind that the FTSE 100 started out at a value of 1,000 in 1984.

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And positive signs for small businesses investment

It might sound counterintuitive, but the relative weakness of the pound over recent months has led to improved returns for many FTSE 100 companies, and this has also affected smaller businesses, both on the stock exchange and privately owned. This is because in the global economic age, a higher proportion of revenue than ever is generated from overseas sales. In other words, the US dollar is often the business currency of choice.

As such, the fortunes of businesses large and small have a greater tendency to track with the dollar than with sterling, and so the strength of the US economy has played into their hands perfectly.

This provides another insight into why investing in a business – whether it is a FTSE 100 giant or a new start up – is a compelling investment option for those who want to spread their risk and look to the long term. It is not just that businesses are tracking with foreign, and in particular US, markets.

There are many that have few if any direct business dealings with the UK at all. Investing in SMEs that have global trading strategies can almost be seen as a form of alternative investment, and one that has little correlation with the strength or weakness of the broader UK economy.

What does the future hold?

With the bubbles still fizzing in the champagne glasses, things came down to earth with a bang as Q3 lurched into action with a one percent drop and the FTSE 100 closing below 7,600.

This was due to a number of factors, including a downbeat start to the quarter on the Asian markets and the latest Purchasing Manager’s Index reflecting an underlying lack of confidence in medium term growth due to Brexit drawing ever closer.

There is also the ongoing fear of a full-scale trade war developing, a factor which was contributory to June’s relatively poor performance compared with April and May. Nevertheless, if we know one thing about the FTSE 100 it is that short term blips are inevitable and it is the long game that should be the focus of attention.

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