The FTSE 100 index is generally a rotten measure of investment success. Over the decades it has been made up of a hotch potch of various companies and sectors which have come and gone as regularly as an estuary tide. As it is isn’t weighted, but rather measured by capitalisation, this means that the index is in effect dominated by a few giants which tend to “bully” the index to reflect their valuations, leaving the smaller minnows with little or no influence. Oh and just to be perverse it doesn’t even have 100 companies in it! (Currently 102.)

As an index, though, it has now assumed a position of authority which it probably doesn’t deserve. The evening news will at some stage always mention the index and its direction up or down will influence the tone and demeanour of the newsreader. Any movement down is obviously a “bad day in the City” and any upside movement almost greeted with relief. This somewhat simplistic approach to the FTSE 100 often leads to gross misinterpretation. After all, a significant proportion of the constituents aren’t participating in the UK economy at all and a higher proportion of their income and turnover is far more international than domestic. So as an example a fall in the FTSE 100 can often be driven by a fall in, say, commodities and miners – and as a sector these would have little direct connection with the UK economy. Yet the mention of a fall in the index would often tend to be accepted as a reflection of the poor state of the economy. In fact for a clearer indication of the state of UK companies it would be better to look at the FTSE 250, being the next size down from the 100.

The Index has, however, reflected the changes of each era as its passes. Back in the seventies the old “imperial” companies were waning as shipping and trading companies were shoved aside by the new compound companies that grew out of the new fashion for corporate acquisition – raiding and empire building (and even asset stripping on occasion, some would say) which gave us the new names of Hanson, Tomkins and Williams. These complicated businesses often built a range or compendium of strange businesses all held together under a rather loose corporate tarpaulin. Tomkins of course covered everything at one stage from guns (Smith & Wesson), buns (RHM) and engineering parts!

The eighties saw the first major privatisations, creating “popular” share ownership and the ubiquitous “Sid” of the British Gas flotation. Suddenly the FTSE was populated with utility companies of all types with millions of shareholders all with relatively small holdings in their gas, electricity and water companies. Over the years these too have waned as the corporate sharks thinned out their numbers such that their representation is now relatively small.

Then came the demutualisations, when building society members suddenly became shareholders in something they never realised they actually owned already. Again millions of small shareholders found themselves thrust into the limelight as these new mortgage banks became the fashion of the time. Interestingly not one exists any more as an independent functioning bank!

The TMT (Telecom, Media & Technology) boom of the late nineties will “live in infamy” as the period when so much was promised based on so little. The triumph of ignorant speculation on worthless internet companies was astonishing and reality finally came through in mid-2000. Once this fashion had passed we then found ourselves with the dream of globalisation coming through, with the mining and commodity companies rocketing on the back of the engineered Chinese/US boom. Now even this latest bubble has burst with the collapse in commodity prices and mining companies and the result can be seen in the most recent changes in the FTSE 100, with Lonmin finally being downgraded.

So what will the FTSE 100 be next year? Well it really depends on what is actually in it?

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BRIC-a-brac?

Possibly a significant concern for 2009 will be the next stage in the development of that wonderful marketing hype, the “BRIC” funds. The BRICs (Brazil, Russia, India and China) are likely to be having an “interesting” year between them. All have already had a torrid time on their markets and many private investors were suckered in by the marketing ploys of fund managers only to see the lustre of these hidden gems to rub off to reveal lumps of baked clay, or just maybe real bricks.

For China next year could be the year of the paper dragon – and a crumpled one at that. The slowdown is biting already and is bound to cause further social friction and subsequent unrest. India has also suffered falling values and the appalling events in Mumbai have added to concerns. Such worries may be further exacerbated if the elections coming up are seen as an opportunity for more aggressive extremist parties to gain power.

Braziltoo has not been immune as the demand for commodity resources has collapsed. The resurgence of Brazil has only served to mask some of the more worrying signs in Latin America. With Ecuador yet again threatening to default and Argentina nationalising its private pension assets, it looks as though we might be returning to some of those loose economic morals and disciplines of the 1970’s. As for Russia – the bear is behaving badly. With weakened commodity prices, the swagger and arrogance has been assuaged to an extent, but with neighbours feeling intimidated and some threatened, things don’t seem to bode well. One flash point may well be Ukraine, where elections could force some stark decisions between Western and Russian influence. Of course the Russians themselves feel intimidated by US actions in Poland, Ukraine and Georgia, some of which are too close to home and in their view too close to their sphere of influence. There will be some dangerous brinkmanship here I believe.

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And finally……………………what a difference a year can make. Just one year ago the Royal Bank of Scotland (RBS) paid $100bn (of which 80% was in cash) for ABN AMRO after a tiresome tussle with Barclays. Much to their unknowing good fortune Barclays lost out.

Only a year later just think what RBS could buy today with the same money:

·      Citibank $22.5bn,

·      Morgan Stanley $10.5bn,

·      Goldman Sachs $21.0bn,

·      Merrill Lynch $12.3bn,

·      Deutsche Bank $13.0bn and

·      Barclays $12.7bn,

and still have $8bn change……!!!  Can it really be true that so much value has been destroyed? Well, yes!

Have a good weekend,

Justin