The rebalancing of the FTSE has taken a narrow range of tech and new economy stocks out of the mid c...
The rebalancing of the FTSE has taken a narrow range of tech and new economy stocks out of the mid cap market.
Only a year ago there were no computer software or hardware companies in the FTSE 100. Last week the stocks which are to make their way into the large cap index were picked. Imminent arrivals are Freeserve, Cable & Wireless Communications, Thus, Psion, Celltech Group, Baltimore Technologies and Nycomed Amersham.
Passing them on the way down will be the likes of Thames Water, Scottish & Newcastle, Whitbread, Hanson, Associated British Foods, Wolseley and Imperial Tobacco.
The response of active fund managers to such a change is hardly unpredictable. Risk positions have, in the words of Jim Strang, head of the UK team at Edinburgh Fund Managers, gone "through the window".
He adds that the polarisation of the market is complete with the new economy stocks soaring ahead into the FTSE.
For the mid cap fund manager the conditions are radically different from five years ago.
Then, an IPO bubble was being quietly fostered by comfortable conditions. The UK had come out of the ERM and sterling was comparatively weak.
Construction stocks were riding a wave and IT was becoming increasingly prevalent. Now, the market has entered a very different era. As a whole new crop of growth stocks sit in the FTSE 250 for short periods of time before ascending to FTSE.
Many market commentators expect a severe correction but with the Nasdaq reaching new highs so regularly, it would be a brave observer to suggest the bubble will burst.
Vanessa James, director, UK equities at Legal & General Investment Management, bel-ieves it is important not to lose sight of the variation within the new economy.
She says: "It is important to remember that it is not one bubble. It is split into software, IT hardware, telecoms (including fixed line and wireless) to dot.coms and a whole raft of developments, ranging from companies which you can actually analyse to those without any sales, let alone any profits."
Isa sales are demonstrating a strong tech bias and this is creating a wall of money effect according to Chris White, UK income fund manager at Johnson Fry.
"Come April and May we will see a cull," he says. "There are going to be winners and losers. The cull will be selective, but some firms will justify their current valuations and the rate of new money coming into IT will slow down."
Among the old economy stocks dropping out of the FTSE are plenty with a long term track record, such as brewing stocks managing to grow profits, earnings and dividends.
A significant rump of old economy stock remains powerful. Bowthorpe, once a sprawling electronics empire has refocused its energies into telecoms.
National Grid has become involved with Energis and has expanded into emerging markets.
For some observers this is a sign not that the markets have gone mad but that there is a real shift occurring in the economy, and one in which a track record of surviving in a high inflation and weak sterling environment is not enough.
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