The FTSE 100 has posted its third straight year of gains, boosted by spectacular turnarounds from UK stalwarts Rolls-Royce and Marks & Spencer.

London's leading share index ended its final trading session of 2023 at 7733.2, which was 3.8% higher than at the end of last year. That represents a £71bn increase in the combined value of its constituent companies.

The more domestically focused FTSE 250 gained by 4.4% over the year. However, the UK indices have underperformed when compared with US and European rivals - something that will not help efforts to stop an exodus of UK-listed companies to overseas stock exchanges.

Engine maker Rolls-Royce has more than trebled in value over the course of the year under new chief executive 'Turbo' Tufan Erginbilgic.

The eye-popping increase has come after Erginbilgic, who famously described the company as a “burning platform” soon after he arrived, announced proposals to cut costs, axe jobs, and fatten profit margins. At the same time the company has benefited from the recovery in air travel after the pandemic.

Meanwhile, Marks & Spencer, under chief executive Stuart Machin, has reclaimed its sparkle with shares more than doubling amid signs that efforts to revive its womenswear sales are finally paying off. However, at 272p the stock is still only just getting back to where it was in 2019.

The wider FTSE 100, meanwhile, has been buoyed in recent weeks by growing hopes of interest rate cuts by major central banks next year.

The topsy-turvy 12 months saw the index climb to more than 8,000 points in February in a barnstorming start to the year before a banking crisis that claimed the scalps of America's Silicon Valley Bank as well as Swiss giant Credit Suisse dragged it lower.

Traders have also been preoccupied by when central banks in the US, UK and Europe will start to cut interest rates. Growing signs that they will start to do so from next spring have spurred the latest rally.

But the rally for London stocks has been paltry compared to those elsewhere. In New York, shares have this week climbed either to, or close to, all-time highs. And Wall Street's S&P 500 index is up by 25% this year, while Germany's Dax has risen by more than 20%.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented: “The FTSE 100 has stumbled over the line, eking out a modest gain for the year but failing to shoot the lights out.

“Britain's blue-chip index still appears unloved with attention grabbed by the bright lights of Wall Street and the tech heavy make-up of New York's exchanges, with a frenzy for all things AI fuelling buying behaviour.

“Even though the Brexit hangover has eased, the UK's stagnating economy and volatile political scene of recent years appears to be putting off investors.”

Fortieth birthday

The FTSE 100, the London stock market index containing the largest listed blue-chip companies, made its debut on 3 January 1984. Midland Bank and Rowntree Mackintosh were among the founder members, but like others they were subsequently subsumed into other businesses.

For the first time it was possible to continuously monitor UK corporate champions such as Barclays, Barratt, British Aerospace, BP, Glaxo, Legal & General, Prudential, Sainsbury's and Shell. Today these companies still form the nexus of the index.

The first Apple Mac personal computer was also launched in January 1984. Forty years later, Apple has a market cap of £2.34 trillion, more than the £2trillion combined market capitalisation of all the FTSE 100 companies.

By 1986, the year of London’s ‘Big Bang’ deregulation revolution in the City, the ups and downs of the FTSE 100 were featuring widely in TV and other news reports. Indeed it attracted almost as much interest as the antics of the new moneyed tribe, the Yuppies (young urban professionals) whose ranks included many City traders.

The widespread attention paid to the index may even have aggravated the alarm caused by its 11% collapse on 19 October 1987 - known as Black Monday - and the further 12.2% tumble on the following day.

But the anxiety dissipated relatively quickly; soon the fall seemed more like a stumble. The FTSE 100 closed the year at 1712.70, 2% higher than at the start of the year.

This was gratifying for those who had seen the Black Monday rout as a chance to snap up some bargains, or had stayed invested. Appropriately, Never Gonna Give You Up by Rick Astley was the hit song of 1987. Keeping the faith has almost always tended to pay off, but it has always required strong nerves and patience.

Promotions and demotions from the index, conducted quarterly, matter hugely because of the prestige involved and the implications for the share prices. Joining the elite is good news. But the index funds that track the index sell off their shares in the relegated companies.

The boom surrounding generative AI has turned its prime beneficiaries into the global stock market stars of 2023. This stock market 'Magnificent Seven' is made up of late 20th century and 21st century names - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

Apple and Microsoft listed on the stock market in the 1980s, but Mark Zuckerberg, founder of Meta, the Facebook, Instagram and WhatsApp empire, was only born in 1984.

What next?

Opinions about the FTSE 100 have seldom been more divided. The index has become a symbol of London's lack of allure as a place to list, particularly for a technology company. At the same time, the FTSE 100 is seen as a bargain in New York and other financial hubs.

The index is trading on a price-earnings multiple of 10.5 times, below its long-run average, making it seem cheap in comparison with other markets.

UBS expects the Footsie to advance to 8160 by next Christmas, while providing a 4% dividend yield.  If this prediction proves to be correct, the Footsie's reputation could be salvaged. There's even more than usual riding on the index's 41st year.

Photo: Marks & Spencer shares have regained their sparkle