Events last week were initially dominated by the restructuring of Vodafone. This was no small deal. Vodafone is a huge company and is widely held amongst UK investors.
Immediately ahead of the deal that was to see billions of pounds returned to investors, along with the stake in US telecoms giant Verizon, the company was valued at comfortably over £100bn – down on its size at the peak of market but not to be sniffed at. At the height of the telecoms, media & telecommunications boom (TMT for short) as the new millennium commenced, Vodafone accounted for around 15 per cent of the value of the whole UK share market.
Mind you, Nokia was then an even greater component of the Finnish stock market, leading to a joke current at the time – what do you call a Finnish stock market tracker? Answer – Nokia. It is a shadow of its former self these days.
Being such a size, Vodafone inevitably created problems for some investment managers charged with tracking the UK market as many funds contained restrictions on the percentage that could be held in any one share – typically a maximum of 10 per cent. This is hardly a problem today but it does serve to show how misleading funds that set out to track an index can be.
Just look at the issues that have dogged our benchmark index over the past seven years or so.
Back in 2007, banks were the largest single sector in the index. Come the credit crunch, not only did their collapsing share prices bring about a remarkable reversal of fortune for the Footsie but their need to trim, and even pass, dividends brought to an end a long period when income from equities was expected to rise constantly, regardless of the performance of the capital.
Then demand from China drove mining and oil shares ever higher, reversing the decline in the value of the index. Many mining companies chose to list their shares in London, propelling this sector to the forefront. Resource stocks are now the most important single component of the FTSE 100 Share index. And it has been the recent poor performance of these shares that have held back the Footsie from reaching new high ground.
The question is, might the Vodafone restructuring help lift this index above the peak attained back at the end of 1999?
I’m not simply referring to the lift Vodafone’s shares enjoyed on the first day of trading in its new consolidated form. The argument is that the cash distributed to shareholders, plus the proceeds of any Verizon shares sold, is likely to find its way back into the market. This is likely to amount to several billions of pounds.
At the beginning of last week it was looking possible. The FTSE 100 rose to within 100 points of its previous peak but indifferent company news and geo-political concerns brought out the sellers, allowing the market to slip back again.
Seldom have I found the mood of investors so difficult to read. Divided opinions should be good news but I am mindful of the technical influences on the index, not the least of which will be the quarterly restructuring, due shortly.
The most likely change on this occasion will be the inclusion of two house builders in the Footsie – a clear sign of how their fortunes have improved over the past couple of years. This should help the performance. After all, you can argue that the FTSE 100 is a measure of Britain’s most successful businesses.
But with concerns over the strength of the global economy continuing and banks still finding the ability to disappoint, it seems that many of the index components remain under a cloud. I still hope for that silver lining, though.
Brian Tora is an associate with investment managers JM Finn & Co