Looking on a long-term basis the FTSE 100 has not moved much. It is not far away from the level it was in 1997. Do not forget the FTSE is not a like for like comparison. It continually removes the poor performers and replaces them with better performing constituents. So even in this survival of the fittest scenario, the fittest have merely stood their ground. Even worse, many of the recent additions are not really UK companies at all and the only reason that there has been any strength at all in the FTSE 100 over the past year has been because of companies such as Antofagasta (Chile), Kazakhmys (Kazakhstan), BHP (Australia) and BP, Shell, and Rio Tinto (Global but definitely not UK). Even companies such as Vodafone and HSBC (one of the ?better? banking stocks this year) are increasingly global rather than domestic.
Does that mean the FTSE 100 is more of a global index?
70% of FTSE 100 stock income is from foreign earnings but even here a large proportion is in US Dollars which until recently has only been marginally stronger than Sterling.
The preponderance of mining, tobacco and oil companies in the index is helping to offset the falls in Banking and Retailers. However it must be pointed out that if the remainder of the index had matched the falls in these two sectors we would be another 2000 points lower.
If the current weakness in the Commodities Market continues and the Financial Sector continues to have problems that would suggest only one direction.
Of course, as mentioned above, the FTSE does replace its constituents. That would suggest any drops will be supported by the stronger companies on their way up. And like the adverts say, the markets can go up as well as down.
In the UK with just about every indicator you care to mention in the red or moving into the red the equity markets look to be defying gravity. This is, as with everything financial these days, an illusion for several reasons. In world terms, the value of UK equities has fallen dramatically as the pound has dropped (for a European or Far Eastern investor in British stocks their valuations are actually another 20% lower in local currency terms). Secondly, much of the income from top line FTSE companies comes from abroad where in some cases the current economic cycle is still thriving and in Sterling terms that means their revenues may have actually increased even though economic conditions worsened.
When we focus on UK centric FTSE 100 stock the picture is much less positive. The retail and banking sectors are performing pretty poorly with many valuations languishing at 50%+ discounts compared to this time last year. The FTSE 250 is off almost 30% from last years highs whilst the senior index was ?only? about 20% lower prior to the Lehman's catastrophe. Given the much more home market based orientation of the FTSE 250 index this is not surprising. Having said that, if you take into account the appalling performance of the UK centric stock in the FTSE 100, it can be argued that either the FTSE 250 is out performing the major index or that many top line stocks have been well and truly oversold.
Which is which? Should we be ? Well that is, of course, where you pay your money and take your chance.
Note that spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.
The FTSE 100 index is used as the benchmark for measuring the strength of the UK stockmarket, and some commentators have argued it has a natural bias to outperform the wider FT All Share index, because it tends to promote to its ranks those stocks which are in the ascendancy and remove others that are falling away.
From time to time the index can appear to be affected by a high weighting given to one particular sector, and it could be argued that at present the mining sector (Anglo American, Antofagasta, BHP Billiton, Kazakhmys, Lonmin, Rio Tinto, Vedanta Resources and Xstrata) has undue influence. Stockmarket traders will recall the famous and dramatic year of 2000 when the FTSE 100 list contained such passing technology stars such as Energis, Bookham Technology, Arm Holdings, Freeserve, Baltimore and Psion ? great memories!
Given the increasing use of tracker funds, it is important to look at where sector and stock monies are flowing, because these fund managers have to match whatever is in each benchmark index, so new entries and deletions are worth researching by CFD traders before they happen.
The purpose of this paper is not to discuss whether or not it is worth buying or selling a new constituent, as significant academic studies (with some conflicting results) have been made on this subject. It is more a summary of what changes to look for in assessing possible constituent moves, and there are various ways that the FTSE 100 list can be changed.
Quarterly reviews
This is the most common way for changes to be lagged. The committee that oversees the various FTSE indices meets quarterly on the Wednesday after the first Friday in March, June, September and December. Constituent changes are then implemented on the next trading day following the expiry of the LIFFE futures and options contracts, which normally takes place on the third Friday of the same month. The rankings of constituents by value are calculated using close of business prices on the day before the review, and companies must have a minimum trading record of 20 days at the review.
A company is promoted to the FTSE 100 index if it rises to 90th or above when the eligible securities are ranked by market value
It is relegated if it falls to 111th or below.
Where there are more companies qualify to be inserted in an index than those qualifying to be deleted, the current lowest ranking constituents are relegated to ensure there are always 100 companies in the index. If there are more qualifiers for relegation, the highest ranking companies that are not already in the index will be promoted to match the numbers.
The six highest ranking non-constituents of the FTSE 100 Index at the time of the periodic review are known as the reserve list, and are used in the event that one or more constituents are deleted from the FTSE 100 during the period up to the next quarterly review.
Fast Entry
The second way a company can enter the FTSE 100 index is if it is a new issue and larger than 1% of the full market capitalisation of the FTSE All-Share Index. In this case it will normally be included in the top 100 after close on the first day of trading, and the lowest ranking constituent is removed.
Eligibility of equities
Only the eligible quoted equity capital is included in the calculation of its market capitalisation, so if a company has two or more classes of equity, significant and liquid secondary lines are included in the calculation of the market capitalisation of the company, based on the market price of that secondary line.
The committee can decide if a secondary line is to be priced separately if its full market capitalisation (before the application of any investibility weightings) is more than 25% of the full market capitalisation. If the full market capitalisation of a secondary line, which is already a constituent of the Index, falls below 20% of the company's main line at the quarterly review, the secondary line will be deleted from the index, but this happens rarely.
Convertible preference shares and loan stocks are excluded until converted.
Rights or other issues
If a company issues shares, partly or nil paid, and the call dates are already determined and known, the market capitalisation is adjusted so as to include all such calls, which would reflect the total fully shares in issue.
Mergers and takeovers
If a merger or takeover results in one constituent in the FTSE 100 index (or FTSE 250 for that matter) to be absorbed by another constituent, there is a vacancy in the appropriate index. The highest ranking security in the appropriate Reserve List as at the close of the index calculation two days prior to the deletion is chosen.
If a constituent company in the FTSE 100 or FTSE 250 is taken over by a non-constituent company, the original constituent will be removed and replaced by the highest ranking non-constituent on the appropriate Reserve List.
The company resulting from the takeover is however eligible to become the replacement company if it is ranked higher than any other company on the Reserve List.
Company splits or demergers
If a member of the index is split or demerged into two or more companies, the resulting companies are eligible for inclusion as index constituents in their own right. This is again based on each new company's market capitalisation (before the application of any investibility weightings).
It may be that the lowest ranking FTSE 100 constituent gets relegated to the FTSE 250, so when GUS demerged into Home Retail and Experian last October, Party Gaming was unfortunately relegated.
Both Robert Thomas & Mike are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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