Following the demise of the banking sector, financials are no longer the FTSE heavyweights but instead oil majors and pharmaceutical giants carry the main weight in the index.
Oil & gas producer BP now commands a 9.9% weighting in the FTSE 100 index, followed by mobile phone group Vodafone at 6.8%, pharma giant GlaxoSmithKline at 6.3%, oil heavyweight Royal Dutch Shell with 6.03% and AstraZeneca at 3.99%. The combined weighting of UK banks HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland, and Standard Chartered amounts to just over 10%.
The oil and pharma sectors will therefore be the new pacesetters in the FTSE 100 and the ones to watch, according to broker ODL Capital, as the influence of banks wanes on the back of their share price declines.
Joe Everitt, Senior Trader at ODL Capital, part of ODL Securities, said: “With BP now accounting for almost 10% weighting of the index it has become a barometer with its performance having wider reverberations on the overall market.”
Banking stocks have regained some ground over the last two sessions, but the move is negligible in the grand scheme of things. Royal Bank of Scotland, for example, was trading almost 13% higher at 24.8p in afternoon deals Friday—a far cry from its 350p levels of a year ago and so distant from March 2007’s peak above 600p as to make it almost unbelievable.
Oil stocks have not been strangers to share price declines themselves but even with crude oil prices seemingly locked in a $39-49 per barrel trading range at present, down from last summer’s $147/bbl peak, industry heavyweights are only 30% lower on average than their oilprice-fuelled peaks of last year and little changed from early 2007 levels, when the banks were soaring.
Recent earnings reports from the likes of BP, Royal Dutch Shell and BG Group have indicated that the sector players are in it for the long haul: battening down the hatches and putting in place strategies that aim to have them ready, when the time comes, to take advantage of an economic turnaround. Subsequently their share prices have been rewarded. Shares in banks, meanwhile, are factoring in relatively high chances of nationalisation. In some cases, that of Barclays for example, the share price looks to be implying a 50% probability of such action.
Barclays is due to update the market on its 2008 results on Monday and will be closely eyed for details on write-downs, past and – potentially – future, particularly in light of Moody’s recent move to downgrade the bank’s credit rating on the back of the rating agency’s “expectation of potentially significant further losses at Barclays”.
Ahead of the Barclays results, UBS forecasts pretax profit for the year of just over £6bn with Barclays Capital broadly breaking even (excluding adjustments for the Lehman Brothers US business acquisition), but believes the company faces industry challenges in 2009 in respect of rising impairment charges and margin management in a low UK interest rate environment.
