Add to that a plume of smoke emanating from Lehman Brothers and fears of both Merrills and Barclays again potentially lining up with their begging bowls, and it does not make for an especially pretty sight.
It is almost as though I can hear something dangerous ticking but I don’t know where. The banking system is still in trouble with everything from confidence, credibility and capital all in short supply. As I have mentioned before, certain banks and building societies won’t be around in a couple of years time as the banking and finance industry shrinks to a smaller number of stronger and hopefully, better managed participants.
In the meantime more unpleasantness is probably going to come to light especially as asset values fall and various corporate covenants are breached. That, along with the eventual resetting of corporate expectations by analysts, may finally provide us with a more honest view of the financial state of the banking system. From that one day we might even be able to invest in them again!
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The FTSE100 index has never been an index to reflect the value of UK plc, but rather it is a far more international index and in fact the most international in the world. This is one factor that has stood the LSE apart from its other rivals and a key reason why it was of such appeal to other growing stock markets.
London has benefitted for various reasons from a useful time zone (between the Far East and the Eastern seaboard of the US), through to its position in the history of the British Empire.
It has also benefitted somewhat fortuitously in attracting companies wishing to raise capital and list “not in America”. Whether from fears of excessive US regulation and reporting, through to an anti-US attitude, London was seen as the only logical alternative. This may have been especially attractive to some of those East European and Central Asian mining companies that have been more recently finding their way to Paternoster Square.
Although the FTSE 250 probably better reflects the state of UK public companies, perhaps there is logic in thinking about a pure UK FTSE 100 Index to better measure the value of UK plc? Certainly looking at the current state of the FTSE 250, down much further than its larger cousin, it clearly gives us a message of the weak state of the public listed companies at home.
However, such international glory has its risks, not least of which is the attitude of pension managers when investing in the FTSE 100 only to find that their longer term returns may now be influenced by unforeseen events in Kazakhstan, Ukraine and other more obscure economically developing areas - investments which may not necessarily be the first considerations for defensively placed pension funds.
What has been interesting is how the make-up of the FTSE by sector weightings has changed over the years. Back in 1998 the banks dominated the index with a strength of around 20%, followed by the pharmaceutical companies at 12% and the oil and gas companies a modest 8.5% and a mere 2% for the unloved miners.
What a difference a decade can make – the banks have shrunk back to 15% and going lower in all likelihood, but oil and gas has powered ahead close to 22%. However, the largest proportionate growth can be seen with the miners, with a dramatic rise to a figure close to 17%.
For those looking for interesting parallels, the TMT (Tech, Media and Telecom) boom peaked at some 35% weighting in 2000 before that bubble burst – the mining, oil and gas sectors now have a conspicuously similar weighting. Although the longer term demand for resources of all kind will still be there, this does have some design features of a not dissimilar bubble about to burst.
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And finally…a Lancashire woman has been jailed for defying her “Asbos” and repeatedly playing her Madonna CD at full volume. Quite right – and can someone just remember to throw away the key please.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited