Here's the latest question sent in by site visitors who have attended equities interviews at investment banks. This question has allegedly been asked in interviews for cash equities positions at HSBC. The answer has been suggested by the person who submitted the question (and is not being advocated by us). If you disagree with the answer, or have any superior alternative responses, please express your opinion in the comments box below.
QUESTION: If you are bullish on the UK economy should you trade the FTSE 100?
You need to assess whether the FTSE 100 is a good representation of the UK economy.
The composition of the index has changed over the years so the answer changes over time but the harsh reality is that (at least in my career and at present) it is not.
Some of the largest stocks in the index are resource stocks, these companies mine for commodities largely in emerging markets such as Africa or Asia and to this end are not representative of the sector components of UK GDP.
The UK is very much a service based economy and so the bottom line is that the FTSE 100 (the bellwether of UK equities) is not a good representation of the UK economy.
If you are bullish on the UK economy, you could certainly stock pick and find equities that you think may benefit, e.g. a bank which makes most of its money in the UK like Lloyds or a retailer like Sainsburys, but the best trades to truly reflect your holistic UK view are through macro products like FX or bonds. By trading the FTSE 100, you are really making a bet on global growth as opposed to UK growth only.