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Comment by c0g | Hacker News Reader

I believe the FTSE is normalised to another basket of equities (also in £) to account for that.

http://www.ftse.com/products/downloads/FTSE_UK_Index_Series_...

Where do you find this in the linked document? I could not find any such statement and it would be news to me, but maybe I am mistaken?

Just to add a bit of detail on the OP's note on the FTSE 100 and the pound depreciation: The point is that the FTSE 100 is composed of the largest UK companies, most of which are global corporations with most of their earnings and also a large part of their ownership coming from outside of the UK. So their intrinsic value is not expected to be affected all that much by Brexit. However, the FTSE 100 measures their value in GBP, which has lost about 10% in value after Brexit. So you would expect the FTSE 100 to increase (if nothing else changes, of course).

I read it that they divide by an 'index divisor' which appears to be denominated in £, leading to the FTSE being a unitless figure.

My point is that if I am right, then the devaluation is taken into account in the numerator and the denominator so cancelled and the FTSE isn't correlated with the £.

Yes, the FTSE is a unitless figure. It is divided by a divisor which is denominated in GBP, which cancels the GBP in the numerator. However, the divisor was set at the beginning of the index (t = 0, with updates being made when there are splits or other corporate actions) in GBP at that point in time and is not adjusted for GBP currency fluctuations.

Nor should it be: The problem with the FTSE 100 and Brexit is not an arithmetic currency conversion topic (which would not be relevant as FTSE is unitless). The "problem" with the FTSE 100 is that it is mainly composed of global corporations for which the British market (and hence the British pound) is of little importance to their daily business but whose shares happen to be traded in GBP.

Take BP as an example - their main product is oil, which is usually traded in USD, they source their oil from around the globe and their assets (infrastructure plus proven resources, which are really future oil revenues and thus USD assets) are also not UK-specific. Thus, it would really make more sense to have the value of BP be expressed in USD. So, let's say BP is worth 100 billion USD (it isn't). Prior to Brexit, that amounted to about 68 billion GBP. After Brexit, BP is still worth the same as before as it is not really affected by any UK-specific economic shock, so 100 billion USD. But now, this translates to 76.1 billion GBP (as the GBP has lost value).

So you end up with an about 12% increase in the value of BP as expressed in GBP. And this is what is relevant for the FTSE 100, so if this happens to all the stocks in the FTSE 100, it will rise by 12% even though nothing changed for the companies in it. Yes, the FTSE 100 is calculated by diving by the index divisor in GBP, but this divisor was set as the market cap of all firms in GBP (at that time) at t = 0 and will not be re-computed based on currency fluctuations.

This isn't "wrong". It's just that it doesn't make sense to point to this specific rise of the FTSE 100 as a sign that the U.K. economy is doing great. The problem is also quite specific to the FTSE 100 - for companies that sell most of their products and services in GBP and that incur most of their costs in GBP, being valued in GBP is the "correct" measure (meaning that their market value in GBP should remain unchanged when the value of the pound fluctuates given that there are no other effects on their business).

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