Stock markets are a barometer of confidence in turbulent times – but beware tensions ahead

Two successful vaccine trials are fuelling the FTSE, but investors should look to longer-term trends

Vaccines fighting coronavirus in the City

As with Moderna this week and Pfizer last week, good news on the vaccine front is spurring on better times for stock market investors. Add in Biden’s presidential victory and it is easy to see why the bulls outweigh the bears right now, and fears over the long-term impact of the second national lockdown and the UK’s Brexit preparedness are taking a back seat.

How to tell? There are multiple ways to take the economic temperature, but the easiest and often the best place to start is to glance at the FTSE 100. For almost 37 years it has tracked the fortunes of the 100 largest qualifying stocks listed in London.

Along the way it has become invested with far more importance than merely providing a blended snapshot of how the largest banks, resources, grocery and pharmaceutical firms that dominate the famous blue-chip club are faring.

On a daily basis from when trading begins at 8am every morning the value of the FTSE 100 is used as a shorthand for prosperity or hardship, part of the visual language of how well the financial world is doing. Green is for good, the colour of prices on the rise, and traders punching the air. Red is for decline and sometimes danger and heads clasped in hands, shaking in disbelief as trading concludes at 4.30pm.

The men who gathered at the Stock Exchange Tower on Old Broad Street on Jan 3, 1984 to oversee a low-key switch-on could not have imagined how far FTSE would go. First of all its value has soared, from an arbitrary 1,000 points to peak at 7,903.50 points during trading on May 22, 2018.

Geographically it has travelled a long way too. To commercialise its indices, FTSE International was created in 1995 as a joint venture company owned by the Financial Times parent Pearson and the London Stock Exchange. The founding chief executive, Mark Makepeace, plotted how to take the brand to customers in the US and expand its reach to untapped territories such as China, South Korea and Saudi Arabia that were seeking acceptance from the international investment community.

Its uses have multiplied too. Initially conceived as a one-off index with which to capture a slice of the developing options and future markets, FTSE has become one of three main players in a burgeoning industry worth $3.7bn last year.

Financial indices, including the Nikkei and S&P 500, are still confidence barometers but they were long ago adopted by the investment industry as performance benchmarks. Fund managers whose decisions outpace a particular index are feted for their wisdom and under-performers suffer huge outflows.

Demand for index data exploded because of the trend for tracking an index, instead of trying to beat it. Rather than singling out stocks to invest in, many money managers spread their risk today by picking trends or topics they think will prosper in the long-term.

To cater for them, there exists almost 3m indices globally, despite only 60,000 stocks in the world. FTSE manages around 200 index families that enable investment by country, asset class, industry, size or strategy.

The most recent boom has come from exchange-traded funds (ETFs), baskets of stocks created to replicate an index that trade just like an individual stock. Their popularity partly explains why the profits at the LSE’s information services division, which wholly owns what is now known as FTSE Russell, hit £449m last year, up by one-third in three years.

Active management is in decline. Passive investing, which is typically lower cost, is dominated by three fund management giants: BlackRock, Vanguard and State Street. Globally, the value of passive funds has swung from 9pc to 27pc of all investment in the 12 years to 2019 according to Morningstar data, led by equities which have gone from 16pc to 43pc over the same period.

The inexorable shift to passive could not happen without index providers, but there are signs of tension ahead. Fund managers who are being squeezed by clients to cut costs resent the fat profit margins of FTSE Russell, MSCI, and S&P Dow Jones Indices. They are exploring alternatives, such as working with cheaper start-ups like Frankfurt-based Solactive to replicate index services for themselves. No wonder the dominant trio’s market share has dropped from 78pc to 70pc in two years.

How the market develops should interest investors and regulators alike. Should a fund manager be able to measure their own performance against an index created and managed in-house? And how much influence does FTSE and its peers wield over the $40 trillion and counting benchmarked against its tools?

Over time, the boundaries between fund managers and index providers will blur. But the data-driven, computerised investment world only works if it retains the precious commodity those flagship indices such as the FTSE 100 track day in, day out: confidence.

FTSE: The Inside Story by Mark Makepeace with James Ashton is out now

James Ashton is a business journalist, author and The Sunday Telegraph’s Questor columnist

Ben Marlow is away