Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The preamble on last week’s chart quiz was about William Playfair, inventor of time-series graphs and irrepressible blaggard.
It’s a pity that both modern biographies of Playfair are priced for the academic market, because there’s enough in them for a Netflix series. It was Playfair who wrote the pioneering works of dataviz from his cell in Fleet Prison after he flooded France with counterfeit notes to crash a revolution he probably helped organise, then who tried to profit from the resulting hyperinflation by printing more notes he falsely claimed had Bank of England backing. The rise of Napoleon and the line chart have the same genesis. Which was worse, who can say?
Anyway. Here are the answers to last week’s quiz:
That’s the share price of Brookfield, the asset manager recently dissected by Dan McCrum and Antoine Gara.
That’s the cumulative amount raised by Anthropic, a gen-AI company that promises artificial general intelligence as soon as next year, and whose chatbot currently underperforms Clever Hans the arithmetic horse.
That’s US foreign assistance as a percent of GDP, as nicked from this story.
Anthropic was the one that threw most contestants, but not Henri Besse de Laromiguière of AB Commodities in Monaco. To him, a T-shirt. To you, better luck this week.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A week can feel like an eternity when the zone’s being flooded with FOMO. Last Sunday, Donald Trump tweeted:
A U.S. Crypto Reserve will elevate this critical industry after years of corrupt attacks by the Biden Administration, which is why my Executive Order on Digital Assets directed the Presidential Working Group to move forward on a Crypto Strategic Reserve that includes XRP, SOL, and ADA. I will make sure the U.S. is the Crypto Capital of the World. We are MAKING AMERICA GREAT AGAIN!
It was a big signal to crypto-world, not for what it said but because of what it implied. The Treasury’s holdings of the XRP, SOL and ADA tokens are literally zero. The Crypto Strategic Reserve therefore had to be a congressionally approved, cashed-up baghodler of last resort. It would be buying tokens on the open market.
Not one word of the tweet was true, however.
According to the factsheet accompanying an executive order signed yesterday by the POTUS, there’s going to be a Strategic Bitcoin Reserve and a Digital Asset Stockpile for other tokens. To build the funds the Treasury will take tokens “forfeited as part of criminal or civil asset forfeiture proceedings”.
Bitcoins “will be maintained as a store of reserve assets”, so held forever. Altcoins (meaning Ethereum, plus any XRP, SOL and ADA it chances upon in future) can be sold but not bought.
Ethereum, having gained then lost reserve-asset status within a week, is down by a bit this morning:
Ether’s dollar price
. . . while XRP, SOL and ADA trade had already resembled a pump-and-dump, Sunday’s tweet-spike having disappeared by halfway through Monday:
XRPSOL
The US government holds seized bitcoin with a value at spot price of more than $18bn, according to Arkham Intelligence data. The state altcoin, memecoin and shitcoin stockpile appears to be a lot smaller: there’s a few million dollars of ether and not much else.
And because people think it’s funny to send shitcoins to government wallets, America holds more POOP, BabyTrump and Colon than three of the tokens Trump had previously identified as national strategic assets:
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(Phil Stafford on MainFT has an excellent summary of what these tickers mean.)
In truth, there was very little chance of a Treasury reserve ever including new purchases of private pseudo-equity. Bitcoin might be trading like a 3x leveraged Nasdaq ETF but in the minds of the faithful, “digital gold” is sacrosanct. Altcoins like XRP, SOL and ADA more closely resemble community currencies. They’re fledgling unregulated white-label fundraising mechanisms for start-ups that don’t yet exist. Resisting centralisation and governmental control is their founders’ whole shtick. Pump-and-dump suspicions aside, traders probably sussed all this pretty quickly.
So, after a brief distraction, we’re back to bitcoin maximalism.
The main point of a US strategic fund, as MainFT’s Brendan Greely said in November, is to stick the Treasury with so much crypto that any restrictive measures become an act of self-sabotage. A side benefit is to remove an overhang that has existed since 2013, when the US confiscated bitcoins from Ross “Dread Pirate Roberts” Ulbricht, founder of the Silk Road dark-web marketplace. (Trump pardoned Ulbricht in January.)
Nevertheless, yesterday’s order indicates in hazy terms that the Treasury might be able to make new purchases for the Strategic Reserve, as long as they’re “budget neutral”:
The Secretaries of Treasury and Commerce are authorized to develop budget-neutral strategies for acquiring additional bitcoin, provided that those strategies impose no incremental costs on American taxpayers.
It’s a distant echo of the bill proposed last July by US senator Cynthia Lummis, which recommended the Treasury buy a million bitcoins using mark-to-market accounting gains on banks’ gold certificates and Fed refunds that don’t exist.
Toby Nangle did a detailed teardown for FTAV of Lummis in November, concluding that while the bill is nonsense, there might still be enough flex in the law to allow bitcoin purchases using the Exchange Stabilization Fund. And OK, maybe. The ESF could be drawn down for bitcoin plunge protection in response to a crash, but routine purchases would be practically impossible to execute with any efficiency.
Bitcoin liquidity has been deteriorating. The launch last year of bitcoin ETFs has moved approximately $40bn into cold-storage custody accounts, while Micheal Saylor’s MicroStrategy is holding another $45bn that he says isn’t being lent out. Wash trading probably inflates daily bitcoin trading volumes but velocity — a per-token measure of market activity — is as low as it was in 2012 when a token cost about $10.
With market liquidity so poor, the $40mn or thereabouts of daily new supply takes on an outsized importance. The combined power of the publicly listed mining companies mints maybe 100 of the 450 new bitcoins produced per day, but they’re not adding to liquidity either.
Mara (formerly Marathon Digital) reported a stockpile of 46,734 bitcoins at the end of February, having last year funded new purchases with a MicroStrategy-style issue of convertible notes. Riot Platforms says it makes “strategic purchases” to add to its bitcoin stockpile, which stood at 18,692 bitcoins at the end of February. Core Scientific didn’t disclose how many of the mined bitcoin it sold in February, having sold none in January.
When it comes to matching incremental bitcoin buyers with marginal sellers you probably have to look further afield, in places where power is cheap and dollars are scarce, such as Iran and Russia’s frontier territories. Does the US really want to be making open-market crypto purchases of uncertain provenance?
The Bitcoin Strategic Reserve proposal as it currently stands will move another 200,000 or thereabouts of tokens from temporary to permanent deep-freeze, and not much else. When only a sliver of 19.7mn bitcoins in existence are in active circulation, the formal removal of an overhang can probably be seen as a positive for the bitcoin price.
Meanwhile, the stockpile plan creates an overhang in all other tokens, from Ethereum to Poopcoin. Compared against the talk last year of the US setting up a crypto SWF capable of paying off the national debt, it’s looking a lot like a bait-and-switch.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Remember all the talk of American exceptionalism? The argument that the US was the only market you needed to care about, and big US technology stocks were basically the new risk-free asset?
Well about that . . .
Yep, as a lot of people have gleefully noted, European stocks have walloped US equities since the election of Donald Trump. OK OK, yes, sure, things look a little different over a longer timeframe – and as the recent wobble shows, European equities aren’t entirely immune from all the noise emanating from Washington lately – but it’s still a fun development, given the gloom long surrounding Europe and all that “American exceptionalism” chatter last year.
Importantly, this seems to be generating real investor interest, with a lot of sell-side analysts recently mentioning how many questions they’re finally getting about Europe.
And this is now beginning to show up in the fund flow data. Another $4bn flowed into western European equity funds in the week to March 5, the most in three years, according to EPFR Global data, taking this year’s inflows to over $10bn.
This might seems dowdy compared to the titanic sums that regularly go in and out of US equity funds, but it is a sharp contrast to the prevailing investor attitude to Europe over the past decade.
Western European equity funds have now taken in money for four straight weeks, the longest streak of inflows since the mid-2021 stock market mania.
So how long can this last? Who knows. Europe is basically the Tottenham Hotspur of international economics – sometimes promising, occasionally embarrassing, ultimately disappointing and unable to win any prizes since 2008.
However, there does seem to be a tentative but fundamental shift in the vibes lately (in European markets, not in north London).
Barclays’ European equity team say the performance of European stock markets has so far primarily been a “relief rally”, but argue that the recent news out of Germany could be the spark for a regime change. Alphaville’s emphasis below:
EU equity outperformance in Jan-Feb was predominantly a relief rally. Systematic investors closed their short positions on Europe once it dawned that damages from tariffs may not be as bad as feared, while hopes of a ceasefire in Ukraine and boost to EPS revisions from weak FX also helped sentiment. This led P/E multiples in the region to climb back to just above fair value levels, and unwind the Trump risk premium that built up after the US election. But while fast money has turned bullish, real money investors remain sceptical of Europe’s catch up extending much further given the still weak growth backdrop in the region. Ytd inflows so far have not even fully recovered the redemptions seen in Q4 last year.
However, fiscal bazooka from Germany this week and news flow of reforms at the EU-wide level could be a regime change and mark the advent of Europe 2.0. At least, this is what the synchronised surge in equities, bond yields and eurusd suggests. Apart from significantly higher defense spending, the German proposals include a EUR500bn fund to spend on infrastructure and reforming the debt brake limits. Meanwhile, monetary policy remains supportive with ECB lowering rates further by 25bps yesterday, although reflationary fiscal policy may reduce the chances of more easing to come.
Big picture, if some of the Draghi’s proposals and other pro-growth/supply policy measures do become a reality, it could restart the domestic growth engine in Europe and Germany, which has been missing since the GFC. Eventually this could lift growth in Europe above trend, leading investors to strategically rebalance their allocations more towards the region and drive valuations above average. This is something not many are positioned for yet, as US exceptionalism has been the playbook for the last two decades.
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Investors and businesses are trying to figure out what, exactly, the US’s endgame is with tariffs against its three biggest trading partners. US stocks are down again, even after another round of tariff relief was proposed.
TS Lombard’s Steven Blitz offers a new comparison for the US in a note this week: The distressed debtor.
The US is not a distressed debtor, by any means. But it does face a few challenges highlighted by Council of Economic Advisors nominee Stephen Miran, who wrote about a possible Mar-a-Lago Accord in a now-widely circulated paper.
Miran’s paper discusses tariffs at length, both as both a “stick” to be used in trading negotiations, and as a driver of government revenues. And hey — the USMCA is up for review and possibly renegotiation in 2026! The paper also suggests a “graduated” approach with “forward guidance”, in the style of the Federal Reserve.
This week’s back-and-forth on tariffs does kind of fit with that . . . fiscal forward guidance adapted for the era of reality television. Maybe their eventual implementation shouldn’t be so surprising after all.
And TS Lombard’s Blitz reminds us that the (potential) revenue-driving feature of tariffs also serves a purpose for the Trump Administration as well. With his emphasis:
Regardless of what percentage of imposed tariffs get passed into final prices, 100% of the tariff goes into Federal coffers and this is what’s behind the urgency to enact them. In playing this card, the Administration is, however, underplaying the risk of trade disruption disrupting capital flows. It is near impossible to untie the Gordian knot of dependence on foreign inflows of capital to reset the dollar to reshore domestic production without reducing Federal debt. To this end, current budget proposals fall well short. Cue the Mar-a-Lago accords – a cram-down forcing captured debt holders to accept a US debt-equity swap. I have a modest counter proposal – make the Fed hold nonmarketable, noninterest bearing non-maturing Treasury debt instead . . .
For the US, tariffs are, in effect, FX intervention with the benefit of financing the budget deficit. Tariffs alone are, nevertheless, insufficient to drive the reshoring activity Trump wants to see. Untying this Gordian knot of needing foreign inflows to finance the budget deficit, but at yields that allow the US economy to keep growing, while also keeping the dollar stable enough to sustain those inflows, is no easy task. The problem with the US unwinding all of this unilaterally is the size of the US budget deficit and, more to the point, outstanding US Treasury debt. In other words, against this backdrop how to weaken the dollar without raising interest rates or, in turn, increasing financing instability.
One solution, as proposed by Miran’s paper (citing old friend of Alphaville Zoltan Pozsar), is to issue “special century bonds” to forex reserve managers, as a way of refinancing outstanding debt. These bonds would presumably also carry relatively low coupons.
Blitz puts it in a slightly different light: Instead of simply proving its state capacity and taxing its population, the US seems to want to use different tools (its global security umbrella) to force its creditors to extend the maturity of the debt they hold.
He calls it a “classic cram down”. With our emphasis this time:
Cue the “Mar-a-Lago accords” – a classic cram down. This is right up Trump’s alley of experience, what to do when firms become too leveraged to generate the cash flow needed to repay the debt and run the business. One could argue the US is in this position… The cram down solution is to force debt holders to recognize they own equity disguised as debt and make them swap their holdings for debt with new terms (much longer maturity, for example) or take in equity, meaning giving up their standing in the stack of creditors in the event of liquidation. The US is not going bankrupt, and it could tax itself enough to run a balanced budget by raising taxes, but chooses not to, believing instead that lower taxes generate the growth to pay for forward obligations. History has proven otherwise.
Debtor-on-creditor violence in sovereign debt markets?! This is classic Alphaville stuff. Very exciting.
Blitz is sceptical about the success of this effort, however. Why would a creditor accept a special century bond? It also raises a risk of the US’s security sphere becoming a one-member club:
The biggest debt holders are outside the US sphere of influence (China), and Trump is pushing out those that are on the inside and hold a lot of US debt (Japan, Germany).
In addition, some nations, such as Japan, need US yields to finance their pension obligations – they have no incentive to trade out into long term paper.
Either everyone choses to be on the inside, make the US defence commitment unworkable and eliminating the trade surplus other nations depend upon — or everyone choses to be on the outside willing to trade out of holding US paper and accept higher tariffs, leaving the US in a much worse position.
So he proposes an alternative: The US could simply do this type of swap at home, and have the Fed trade out its portfolio for non-marketable zero-coupon bonds. With our emphasis:
In the immediate moment, 15% of US debt could become zero-coupon, a sizable reduction of debt servicing costs. Treasury would then have to pay the banks, through the Fed, the interest on reserves, which they are effectively doing now anyway because the Fed is running at a loss. Monetary policy then becomes managing the outstanding supply of marketable UST using IORB as the lever. This could be long-term preferable, because it eventually means management of the economy goes to where it belongs, the fiscal side.
It’s a quick win and a steep reduction of US debt servicing costs . . . though it’s also unclear that it would achieve the stated goal of restructuring the global trading system.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The rally in European aerospace and defence stocks has one notable laggard today:
Wee! And it all looked so promising at the open. Full-year 2024 results from FTSE 100-listed Melrose beat expectations and came with a five-years-out target for £600mn of free cashflow, which is about 20 per cent higher than the consensus.
As usual with Melrose, however, there’s a rather complicated mismatch between reported profit and cash.
Melrose posted an adjusted operating profit for its engines business of £422mn, but this included a “£274mn of total variable consideration” from Risk and Revenue Sharing Partnerships. The 2025 guidance includes another “variable consideration” of between £320mn and £360mn. By 2029 the VC rises to £500mn.
These are non-cash items, as we have discussed previously, and are a big part of the £544mn of adjustments that turned last year’s £4mn statutory loss into an operating profit.
Melrose said the 2024 variable consideration was “in line with our expectations”, but its guidance for future years was very much not in line with market expectations. The number was meant to go down, relative to total contract value, not up.
The way Melrose amortises profit on long-term engine contracts has long been a bugbear for the market. The stock having crashed 30 per cent over the 12 months to last October on worries around cashflow, Melrose hosted an accountancy teach-in and published a booklet, though it seems to no longer be online. (Update: link’s working now.)
Here’s the relevant bit:
[A]t the point we deliver our engine component we are required by IFRS 15 to record a proportion of future aftermarket income called variable consideration. This is due to a combination of specific contractual rights and the nature of our components in these partnerships, which typically last the lifetime of the engine.
The variable consideration, which is currently around a quarter of our overall RRSP revenue, effectively recognises or pulls forward a percentage of our future contractually entitled aftermarket income and treats it as revenue at the point of delivery of our components. In order to pull forward the aftermarket income, a rigorous assessment of future revenues and costs is made. This assessment draws upon OEM inputs and other market data for items such as expected fleet size, flight hours and cycles, frequency of shop visits and the expected profitability over the life of an engine.
Importantly, IFRS 15 requires us to ensure that any revenue pulled forward must be highly probable to not reverse at a later stage. As a consequence, any revenue pulled forward is risk adjusted and currently we record only 10% to 30% of available aftermarket income over the life of the engine, despite having substantially completed our work at the manufacturing stage. Our risk assessment considers a wide range of programme risks including the length of an engine’s life, potential programme cost pressures, and the cost of any additional development work. These assumptions are reassessed annually and, where appropriate, the prudence is unwound, resulting in a “catch up” addition to variable consideration being recognised.
Variable consideration creates a mismatch between profit and cash, since the cash is typically received at the point of the shop visit that takes place routinely, but often several years after a percentage of the revenue and profit is recorded. This mismatch is most acute whilst two of our 19 RRSP contracts remain cash negative and the gap is expected to be at its largest in absolute terms in 2024. Variable consideration leads to an increase in the unbilled work done asset in the Melrose Group balance sheet and this asset is expected to continue to increase as OEM deliveries grow, and the programmes mature, ahead of the rate of amortisation.
Sure, fine. But note the guidance in bold (our addition) where Melrose said it would only book “10 per cent to 30 per cent of available aftermarket income” over the engine’s life. From that, investors and analysts assumed the 2029 variable consideration would fall to about £350mn.
However, according to JPMorgan, the most important bit of the October teach-in wasn’t the up-to-30 per cent guidance, it was the word “currently”:
After speaking to management, we understand that ‘currently’ was meant to refer to the near-term (i.e. 2024-26). Thereafter, as new engine programmes mature and the risk profile drops, Melrose expects to pull forward over 30% of the future aftermarket each year. For example, to achieve VC of £500m in 2029, we estimate the pull forward is c36%.
What this means is, while 2029 expectations can move higher (as much as any analyst was looking that far ahead) the bigger than expected pull-forward of yet-to-be-earned aftermarket income is likely to make cashflow forecasts for 2025, 2026, 2027 and 2028 move lower.
It’s this kind of thing that makes Melrose a recurring feature on this blog.
Further reading: — The great Melrose cashflow conundrum (FTAV) — Breaking down the Melrose founders’ last big score (FTAV)
Your guide to what the 2024 US election means for Washington and the world
While the Democratic Party expresses disapproval of the Trump administration’s wrecking-ball authoritarianism by wearing pink, investment banks have been seeking guidance from America’s stand-in opposition: conservative and libertarian think-tanks.
The Washington Strategy team at Jefferies invited Jessica Riedl of the Manhattan Institute and the Cato Institute’s Alex Nowrasteh and Ryan Bourne in for a chat. The subject was Doge, the Department of Government Efficiency, and whether there’s any truth to its claim to have saved $105bn through workforce reductions and contract cancellations.
TL;DR — no.
Key takeaways: 1) DOGE’s actual impact is less than $10bn; 2) DOGE cannot reduce spending passed by Congress; 3) Meaningful cuts would require reforms on entitlement programs.
Here, via Jefferies, is Cato Institute’s Doge strategy ready-reckoner:
1. Purging progressive influence: DOGE is being used to remove left-leaning personnel and policies from the federal government. This is evident in its exemption of security agencies, its focus on dismantling diversity programs, and its termination of probationary employees hired under the Biden administration. 2. Musk-style corporate restructuring: DOGE is applying Elon Musk’s cost-cutting playbook to the federal government, prioritizing workforce reductions despite personnel costs being a minor share of overall federal spending. 3. Public relations strategy for spending cuts: By spotlighting small-dollar programs, it may be using public misconceptions about federal spending to push a broader austerity agenda. 4. Legal challenge to expand executive power: DOGE is testing the limits of presidential control over federal spending, potentially setting the stage for a Supreme Court ruling that weakens legislative constraints around impoundment. 5. Political cover for fiscal policy: DOGE serves as a shield for congressional Republicans, allowing them to extend the 2017 tax cuts and expand the deficit while enacting only minimal spending reductions.
And for what? A $10bn reduction would be less than 0.2 per cent of the US fiscal deficit. Summing up Doge’s approach as “spending cut performance art”, the Manhattan Institute presentation puts true savings at “closer to $2bn, or 0.03 per cent of federal budget”.
Musk’s hand-wavy target of cutting between $1tn and $2tn by July 2026 remains in place, but even the $105bn it has claimed so far doesn’t stand up to scrutiny. Nor, if the idea is balancing the budget, does a strategy of lay-offs and contract cancellations make a lot of sense; not when social security, Medicare/Medicaid, veterans’ benefits, defence, and interest payments account for 75 per cent of federal spending.
Cutting 25 per cent of federal employees would save only 1 per cent of the budget, and eliminating USAID would only account for 0.6 per cent of the spending. A more practical target would be addressing payment errors, but it would yield only around $100bn in saving.
These figures are dwarfed by the scale of what’s required:
Under the current tax code and modest spending adjustments, the deficit is projected to rise from $2tn to $3.6tn in the next decade. If the US ever defaults on its debt, no external bailout would be possible, and the resulting economic shock would be severe. A key driver of rising costs is Social Security, largely due to demographic shifts—while five workers once supported one retiree, that ratio has fallen to three and is expected to reach two in the next decade. Some lawmakers acknowledge that adjusting Social Security would be necessary, but raising the retirement age or reducing benefits is politically costly.
Having the world’s reserve currency makes debt of 123 per cent of GDP just about tolerable. When it stops being tolerable is the issue. Jefferies puts forward the argument that significant cuts will have to come eventually.
The Cato Institute outlines possible ways to reduce the fiscal spending by as much as $2.4tn, including entitlement reform (Social Security and Medicare), eliminating corporate subsidies, ending federal aid to states, selling federal assets, simplifying the tax code to promote efficiency, and regulatory reform to spur growth.
Going by the constitution, Congress has sole responsibility for matters fiscal, so investors are at risk of paying Doge too much attention (though fans of democracy may feel they have little choice).
We’ve extracted the Manhattan Institute and Cato Institute PDF slide desks from Jefferies’ research. Shout at us by email if you believe that to be a problem.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Earlier this week, the London Stock Exchange Group’s indexing business FTSE Russell announced some subtle but interesting changes to its rule book. Index methodology might not be everyone’s cuppa, but give it a try.
From September onwards, its various UK indices will admit companies with dollar and euro-denominated shares, rather than just the sterling-denominated ones permitted by the current regime.
FTSE Russell will also make it easier for companies to be admitted quickly into its flagship UK indices. Before, companies needed a £2bn market cap to be eligible for a “fast entry”, but this will be lowered to £1bn, and the relative ranking requirement will also be relaxed
Here’s the new wording of FTSE Russell’s Fast Entry Threshold rule:
If an IPO company ranks 225th or above based on the close price on the first day of unconditional dealings; and has an investable market capitalisation of GBP 1bn; then the company, if otherwise eligible, will be placed in the FTSE 100 or FTSE 250, as appropriate (ranking at or above the index review auto-include thresholds, of 90th or 325th, respectively), after the close on its fifth day of trading. Concurrently, the lowest rank constituent will be deleted from the applicable index and associated membership changes implemented.
Can these moves halt the LSExodus and restore the London’s capital markets vim of yore? No, obviously not. C’mon. The great stock market listing migration is driven by yawning valuations differentials and the multinational operations of many modern companies. Slight rule book fiddles aren’t enough to dent those forces.
Nor are these revolutionary moves. FTSE Russell will still require a company to be of “UK nationality” and be listed on the LSE to make it into the FTSE 100 or 250. At the moment there isn’t a single company that would be affected by allowing dollar or denominated securities to be included in the FTSE benchmarks.
FTSE previously did allow euro and dollar listings, but scrapped this in 2014 because “negligible exposure to non-Sterling traded securities at that time led to unnecessary currency risk within the derivative markets”. Companies could still list in dollars or euros after that, they just weren’t eligible for main market inclusion.
Even the new Fast Entry Threshold would only have affected 11 companies historically, and only three of them would under the revised rules have been eligible for the FTSE 100 at the time of their listing. (Royal Mail, Worldpay and ConvaTec).
However, it could help at the margins, and shows that the LSE is capable of moving beyond blaming the financial media and pension funds in its effort to regain its mojo. Moreover, it has plenty of other levers and knobs it could twist and pull that cumulatively might add up.
Speeding up index inclusion will make the process a bit more attractive to companies, and facilitating dollar and euro listings could potentially entice a few companies whose businesses are anyway international. As David Sol, global head of policy at FTSE Russell, said in the methodology review statement:
We regularly look at the methodology of our indices to ensure they continue to represent the underlying market and sectors. This includes our recent review of the FTSE UK Index Series, where the companies included are inextricably intertwined with the companies that list on the London Stock Exchange. Whilst there will be no immediate impact on the index composition, these two changes will give the FTSE UK Index Series a timely and more accurate representation of companies that can list in London today and in the future.
But for Alphaville the really interesting thing is how this once again highlights how tricky the indexing business is. The whole thing is a minefield of metaphysical questions.
What makes a “UK company”? As FTSE Russell points out in its accompanying FAQ, about 86 per cent of all revenues generated by companies in the FTSE 100 actually come from overseas. What makes a tech company? Amazon is often classified as a “consumer discretionary” stock, and therefore doesn’t appear in tech ETFs, while Meta and Alphabet do, despite being classified as “communication” stocks. Is Brookfield a Canadian or US company? It recently moved its headquarters to New York to secure US index inclusion, but its parent and centre of gravity remains in Toronto.
These are all super-nerdy, mega-niche questions, but in a world where benchmarks matter more and more, they can end up having a fairly sizeable impact.
Further reading: — Index providers are massively dull — and massively profitable (FTAV) — The index providers are quietly building up enormous powers (FT) — ‘Volmageddon’ fine may hint to era of stricter index regulation (FT)
