Published: January 10 2011 01:00 | Last updated: January 10 2011 01:00
Natural resources companies are driving London’s blue-chip share index as never before, with the oil and mining sectors now ranking first and second in terms of weighting in the FTSE 100 and accounting for more than a third of the index’s capitalisation.
The dominance of raw materials companies is likely to grow this year as three companies – Glencore, Severstal Gold, and Bumi – are expected to list and become contenders for inclusion in the FTSE 100.
Mining and oil and gas companies – led by BP, Rio Tinto, Royal Dutch Shell, BHP Billiton and Anglo American – account for 34 per cent of the UK benchmark’s capitalisation.
That is up from 29 per cent in December 2007 at the height of the commodities boom.
“I cannot imagine that at any time in history resources, as defined by mining and energy companies, have ever represented as much on the exchange as they do today,” said Ian Henderson, head of JPMorgan’s natural resources funds, who has professionally invested in raw materials stocks since 1977.
“It must be an absolute record.”
The rise of resource stocks, which are tied to volatile commodities prices, could add larger one-day rises and falls to an index prized for stability.
The mining sector’s “beta”, or measure of volatility relative to the London market as a whole, was 1.7 in 2010, meaning that it outperformed the wider market by a factor of 1.7, according to Financial Times statistics. The oil and gas sector was more stable, with a flat beta of 1.0.
“The index will become a lot more volatile,” said Ephrem Ravi, mining analyst at Morgan Stanley.
The miners are likely to swing the index more than the oil companies, he added, because underlying metals prices tend to be more volatile than oil prices.
Richard Urwin, head of investment for the fiduciary mandates investment team at BlackRock, played down any link between fluctuating oil and copper prices and blue-chip index volatility.
“Just because they are a big part of the market it doesn’t mean you have a huge sensitivity to commodity markets. BP and Shell are not pure plays on the oil price these days,” he said.
The rise of resource stocks, Mr Urwin added, was a global phenomenon.
Other investment professionals said they remained sanguine about the rise of resource companies as it appeared more in line with global demand than the similar increase in weighting of telecom stocks at the end of the 1990s, which was due to huge overvaluation.
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