With the share price of Shell PLC (LSE:SHEL, NYSE:SHEL) pulling back after today’s trading update, AstraZeneca PLC (LSE:AZN) has cemented its position as Britain’s most valuable company.
Shell’s market capitalisation – calculated by multiplying the number of shares in issue by the current share price – is £160.9bn, whereas drugs giant AstraZeneca is valued at £162.1bn.
It’s not the first time AstraZeneca has been top dog on the London Stock Market; readers of a certain age will remember that Zeneca was spun out of Imperial Chemical Industries (ICI) in 1993 and that ICI was for much of its time as an independent company (it got taken over by Akzo Nobel in 2007) the largest manufacturing company in Britain.
Fashions change, however, and sectors go in and out of fashion. Today, there is only one chemicals company in the FTSE 100 – Croda International PLC (LSE:CRDA) – and its market value is equivalent to just 0.5% of the total capitalisation of the index.
That 0.5% figure is often referred to as the sector’s “weighting”, which is a measure of how much a change in the value of the sector would affect the index; the bigger the weighting, the more extreme the effect the sector’s share price movements will have on the value of the index.
As of now, Health Care, comprised of AstraZeneca, GlaxoSmithKline PLC (LSE:GSK), Smith & Nephew PLC (LSE:SN) and the relative tiddlers Hikma Pharmceuticals PLC and Dechra Pharmaceuticals PLC (LSE:DPH), is the most heavily weighted sector, at 12.5%.
It is often remarked that the performance of the mining companies, none of which have any mining projects in the UK, has a disproportionate effect on the direction of the FTSE 100 and this is borne out by its 11.5% weighting.
That weighting and the “overseas” nature of the mining companies’ interests reinforces the view that the FTSE 100 is not really representative of UK PLC or, if you prefer, the performance of the UK economy.
Put another way, Croda, the sole member of the chemicals sector, would have to rise by 22% to match the effect on the index that a 1% movement by the Basic Resources sector would have.
Should you lump in the Energy sector – that’s Shell and BP PLC (LSE:BP.) – in with the Basic Resources sector, that’s a 22.4% FTSE weighting (Energy’s weighting is 10.9%).
Meanwhile, for all the talk of former prime minister Margaret Thatcher’s policies making Britain far more dependent on the financial sector, it is worth noting that the weighting of the Banks at 9.2% is practically the same as the weighting of the Industrial Goods & Services sector (9.1%).
The fact that many of us would be hard-pressed to name five of the 19 companies in the Industrial Goods & Services sector, whereas we could probably name all five banks, indicates that the banks tend to be heavier hitters than the metal bashers, defence companies, packaging companies and rat-catchers that make up the Industrial Goods & Services sector.
Indeed, for many years, HSBC Holdings PLC (LSE:HSBA) – good old Hong Kong & Shanghai Banking Corporation as was – occupied the top slot on the London stock market that AstraZeneca currently occupies. HSBC has since slipped down to the bronze medal position and is worth a “mere” £106bn.
One sector that conspicuously does not have a big weighting is Technology (1.2%), which accounts for just 1.2% of the Footsie’s total market capitalisation.
There, in a nutshell, is why London’s headline index has not performed anywhere near as well as its US counterparts over the last 20 years or more.
The sector comprises Auto Trader Group PLC (LSE:AUTO), Avast PLC (LSE:AVST) (a German company soon to be subsumed into a US one), Aveva Group (LSE:AVV) PLC (largely owned by France’s Schneider) and Sage Group PLC. None of those companies, to the best of my knowledge, has attracted the attention of Scottish Mortgage Investment Trust PLC (LSE:SMT), a trust that has quadrupled in value over the last four years through investing in game-changing companies, many of them in the technology sector.
Britain, it seems, does not really do technology. A case could be made for lumping in Telecommunications, which with its 2.8% share would make the Tech + Telecoms weighting 4.0% but this is a waning sector in the UK; the two big beasts are BT Group PLC (LSE:BT.A), down 58% over the last five years, and Vodafone Group PLC (LSE:VOD), down 38%.
Had the composition of the FTSE 100 been the same five years ago, the Telecoms sector’s weighting would have been around 5.5%, so its weighting has halved in that time.
Doing a five-year weighting comparison is not strictly a case of comparing apples to apples because the composition of the index changes on a quarterly basis depending on the fluctuating market capitalisations of leading companies. The original constituents included long-gone and (occasionally) fondly remembered fallen giants such as Associated Dairies Group (also known as Asda), Bass, Boots, British Home Stores, Burton, Courtaulds, Distillers, General Electric (NYSE:GE) (once the biggest company in the UK), Hawker Siddeley, ICI, MFI, the Peninsular & Oriental Steam Navigation Company (P&O), Plessey, Racal, Rowntree Mackintosh, Thorn EMI and United Biscuits.
That being said, if “now were then”, the sectors that have seen the biggest growth over the last five years are: Basic Resources +4.6%; Health Care +4.5%; Financial Services (i.e. fund managers) +3.0%; and Industrial Goods & Services +2.8%.
Those that have lost ground include Banks -5.0%; Energy -4.8%; Telecommunication -2.8%; and Food, Beverage and Tobacco -1.8%.
Go back 10 years and the best performing sector is Industrial Goods & Services, which has (nominally) seen its weighting rise from 5.3% to 9.1%. Over the same period, the “if-then was now” weighting of the Banks has fallen from 15.0% to 9.2%.
Unless those scare stories are true about London’s position as one of the world’s major financial centres deteriorating as a result of Brexit, then the relatively good performance of Britain’s “makers” – companies that make things rather than provide services – seems at odds with the country’s reputation as one scraping a living as the money laundering and tax avoidance capital of the world.
The London stock market may be a kind of retirement home for companies that made their mark half a century or more ago and Britain has long since stopped being the workshop of the world but it seems as though those manufacturing companies that are still surviving are making a decent fist of things.
List of sector weightings on the FTSE 100
- Banks: 9.2%
- Basic resources: 11.5%
- Chemicals: 0.5%
- Construction & materials: 1.0%
- Consumer products & services: 2.7%
- Energy: 10.9%
- Financial services: 5.4%
- Food, beverage and tobacco: 9.4%
- Health care: 12.5%
- Industrials goods & services: 9.1%
- Insurance: 3.6%
- Media: 3.5%
- Personal care, drug & grocery stores: 7.8%
- Real estate: 1.5%
- Retail: 1.4%
- Technology: 1.2%
- Telecommunications: 2.8%
- Travel & leisure: 2.2%
- Utilities: 3.7%