The FTSE 100 will have close on a 40% exposure to telecom, media and technology stocks this week, wr...
The FTSE 100 will have close on a 40% exposure to telecom, media and technology stocks this week, writes Jane Wallace.
Once the index is rebalanced at the close of business on 17 March with nine new entries and nine departures, the result will be an increase in the volatility of the blue chip index according to Stewart Breed, quantitative analyst at Salomon Smith Barney.
On that day Cable & Wireless, Freeserve, telecoms firm Thus, Baltimore Technologies, Psion, biotechs Nycomed Amersham and Celltech Group, support services company Capita Group and EMAP will be included in the FTSE 100.
To make way for the newcomers, more traditional businesses Associated British Foods, Allied Domecq, Hanson, Whitbread, Scottish & Newcastle, PowerGen, Thames Water and Wolseley will be relegated to the FTSE 250. The rapid rise of technology stocks is being driven by retail investors and will be exacerbated by tracker fund purchases once the stocks enter the index, according to Jeff Saunders, investment director at Standard Life Investments.
The effects of momentum buying can be seen in share price performance this year so far. BSkyB has outperformed the FTSE 350 by 120% since the beginning of the year, Reuters has outperformed by 92%, Celltech by 228% and Baltimore Technologies by 170%.
Meanwhile, more traditional businesses are suffering. British Energy has underperformed the same index over the same period by 45%, Rio Tinto by 37% and Rentokil by 40%.
In fact, in the year to 10 March, the FTSE 350, excluding the TMT sectors, has underperformed the market by 20%, according to Saunders' calculations.
He said: "There is an asset allocation switch out of ordinary companies into companies which nobody knows how to value and it is coming from the general public. They are moving out of value funds and into index trackers or momentum funds. Some fund managers are using share price strength as the only criteria for buying stocks and they are attracting money."
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