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The Markets
by Proactive
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Mining

Commodity price drop is changing face of stock market

Property and investment stocks are replacing miners and oilers in Footsie

The oil and commodity price slump is changing the face of the UK's stock markets, analysts said on Monday.

Commodity and oil-related shares are falling from market prominence as crude prices drop and the Chinese economic downturn hits metals, they said.

The latest shake-up in the FTSE indices, which took effect at the start of Monday's session, resulted in more demotions in the sector as companies face cutbacks.

Oil services supplier Weir Group (LON:WEIR) fell into the second tier from the FTSE 100 as house-builder Berkeley Group (LON:BKG) took its place.

And African platinum Lonmin (LON:LMI) fell out of the FTSE 250, to be replaced by pharmaceutical and investment groups.

Analysts said the moves represented a ongoing trend in the UK's leading benchmark index.

Since 2012, 14 commodity-related stocks have been demoted from the Footsie.

They include Acacia Mining (formerly known as African Barrick Gold) (LON:ACA), Amec Foster Wheeler (LON:AMFW), Cairn Energy (LON:CNE), ENRC, Essar Energy, Evraz (LON:EVR), Kazakhmys (LON:KAZ), Lonmin (LON:LMI), Petrofac (LON:PFC), Polymetal Intl (LON:POLY), Tullow Oil (LON:TLW), Weir Group (LON:WEIR) and Wood Group (LON:WG.).

They have been replaced by more domestically-focused plays like shopping centre developer Intu Properties (LON:INTU), Merlin Entertainments (LON:MERL) and Sports Direct International (LON:SPD), as well as house builders Barratt Developments (LON:BDEV) and Taylor Wimpey (LON:TW.).

Glencore International (LON:GLEN) was the last miner to enter the elite index in 2011, although that company is now facing its own problems.

Last week, it raised £1.6bn to slash debt and shore up its balance sheet as commodity prices fall. Glencore shares have been the worst performer on the FTSE 100 this year so far as prices of many of the commodities it trades and mines have tumbled.

The mining group has shed more than three-quarters of its value since it listed in 2011. Its shares have fallen two-thirds since it made an early stage merger approach to Rio Tinto (LON:RIO) in July 2014.

Investment director at AJ Bell, Russ Mould, said the market’s love-affair with commodities was continuing to cool and could take a while to rekindle itself.

He said: "History suggests it could take some time for investors to recover their ardour.

"During the 1998-2000 bubble, a technology company entered the FTSE 100 on 16 occasions in 1998-2000, including some more than once, only for 12 to shoot straight out between 2000 and 2003.

"Only Autonomy and ARM subsequently made it back to the big league and it took them seven and nine years respectively to do so."

Analysts say there has been a shift away from stocks with large Asian exposure, particularly commodities, to shares with a more domestic focus.

Smaller stocks with untapped growth potential have also been in favour rather than heavyweights vulnerable to commodity price movements.

Nevertheless, there are still 10 resource-related firms in the Footsie including Anglo American (LON:AAL), Antofagasta (LON:ANTO), BHP Billiton (LON:BLT), BG Group (LON:BG.), BP (LON:BP.), Fresnillo (LON:FRES), Glencore, Randgold Resources (LON:RRS), Rio Tinto and Royal Dutch Shell (LON:RDSB) althoug the latter is buying BG.

In a note earlier this month, broker Liberum Capital sounded optimism on prospects for the commodity sector, saying it could benefit from an upturn in the Chinese housing market.

It cited several reasons to be positive in the short-term including copper supply issues and Chinese fiscal stimulus and the eventual impact on data of monetary stimulus.

But Liberum added: "However big structural issues remain and we will ultimately turn sellers of the rally."

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