The financial media’s job is to make us read (and absorb advertising). So it makes sense that their focus is on the exciting share price moves. However, this often means that we aren’t made aware of what is really driving equity indices, like the UK Index , higher or lower. The UK Index is up 480pts this year, but did you know that HSBC has added 58pts while GlaxoSmithKline, has deprived it of 35pts?

When you read today’s market roundups, they are sure to talk of the biggest share price moves in terms of percentage gains or losses. For example Carillion  down 30%  after its profits warning, United Utilities down 5% after a broker downgrade and Petrofac up 6% on bid spec. However, this doesn’t always mean they helped or hindered the UK’s flagship UK 100 index. In fact United Utilities is the only blue-chip of the three.

The UK 100 index currently trades at 7385. This is based on the market value of each of its 100 constituents, to which a specific weighting is applied. For example, oil major Royal Dutch Shell accounts for a considerable 9.53% of the index, banking behemoth HSBC for 7.15%, British American Tobacco for 5.55%, fellow oil major BP for 4.75% and pharmaceutical giant GlaxoSmithKline for 3.17%. A whopping 30% of the index from just five names! To counter that 30% weight, you’d need to group together the bottom 74 names on the index.

It’s obvious that big moves by big weight stocks will have a big influence on the UK Index . However, it’s often overlooked how even small percentage moves can still influence the index. So even if BP is only +0.3% today, it is still adding almost 1 point to an index which is flat for the day. Nothing to get excited about for the share itself, but among the top ten contributors today. Imagine that across the 30% of the UK Index mentioned above. Not only can it subtly drive the index higher or lower, but it can also prop the index up by offsetting big moves by smaller weighted companies.

With results season in full swing, and big share prices moves on offer (up/down 5-10% not uncommon on good or bad news) note that engineer Babcock International reports results on Tuesday. However, even if it rallied 20%, its measly 0.2% UK Index weighing means it might feature in the media as an index mover, but it would have to do more than that to be a UK Index influencer. It would have to rally or fall by 40% to move the index by just 5pts. easyJet (0.25%), also reporting Tuesday, would have to move by at least 30% to generate a UK Index 5pt move, and United Utilities (0.28%) by 25%.

It is especially important to know this when trading the UK 100 index, understanding who has a big weight and who can have an outsized influence. It has also become an issue in the US with the flagship US Dow Jones pushing record high, however, its 30 components are actually weighted by price. So the higher the stock price, the bigger the influence. So both GE and Boeing are worth $158bn by market capitalisation, however the former trades at $18 per share and the later at $264, so their respective weights and thus influence are 0.5% and 7.74%. A difference of 15 times. Crazy.

Remember next week’s UK budget could influence sentiment towards UK share prices, be it directly or indirectly. Moves in UK Sterling have had a major influence on the UK Index index since the Brexit vote, GBP weakness helping many shares to record highs. Might duty changes impact British American Tobacco. Oil remains volatile which could move BP or Shell. Any change on petrol duty? Glaxo has been releasing lots of drug updates lately. More next week? HSBC could be swayed by changes in attitudes towards Asia, given its focus on the region.

Next time you trade the UK 100 , it might be worth checking who’s driving it north or south. In case you have an opinion on its member stocks. If you’re bullish on the index but bearish on oil, remember that oil majors make up 14% of the index. That could represent a problematic contradiction. Furthermore, adding to what i told you earlier, the biggest ten members of the UK Index account for 40% of the index, the largest 15 members for 50%, the biggest 20 for 60% and largest 30 for 70%. Huge numbers.

It makes sense to know what’s going on under the hood, it’s not a secret. The UK Index doesn’t just rise or fall all on its own.

To be kept abreast of who’s in the UK Index driving seat click here to get access to our research. You won’t regret it.

Have a great weekend,

Mike van Dulken, Head of Research, 17 Nov 2017