The currency effect - boosting FTSE100 performance

When it comes to their constituents, some indices do not always list one major driver of performance: currency.

• The companies that make up the constituents of the FTSE100 are generally more internationally focused than the S&P500.

• Over 60% of S&P500 companies generate most of their revenue from the US; however, only 30% of FTSE100 companies generate most of their revenue from the UK, with half generating their revenue from international markets.

• As a result, currency plays a larger part in the performance of UK companies (and therefore indices), as revenue earned in another currency is translated back to GBP for accounting and cash flow purposes.

• A number of companies may hedge they revenue they earn in another currency back to GBP, but this does mean that currency movements can’t disproportionately impact returns.

• When sterling strengthens, any overseas income will be worth less when converted back to GBP; similarly, when sterling weakens, overseas income is worth more in GBP terms.

• Over 2022, sterling weakened dramatically, providing a tailwind for UK companies that get a significant part of their revenue overseas.