Redrawing the blue-chip index map

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The FTSE 100 is poised for a fresh bout of internationalisation that will make it even less of a weathervane for the British economy.

Next week’s quarterly review of the UK’s most famous share index is almost certain to lead to the inclusion of Essar Energy, the Indian power, oil and gas group that floated in London in April.

Companies with a chance of entering with Essar include African Barrick Gold, a Tanzanian gold producer spun off from Canada’s Barrick Gold, and Petropavlovsk, the Russian gold miner formerly known as Peter Hambro Mining.

Meanwhile, candidates for possible relegation in the June 9 review include Thomas Cook and the London Stock Exchange, according to Winterflood Securities.

Broadly speaking, the FTSE 100 is a roll-call of the top 100 UK-listed companies by market capitalisation, although some other criteria apply.

Market volatility makes it difficult to predict which of the pretenders will make the cut this time round, but the inclusion of one, two or even three of them would reinforce a cosmopolitan trend that took off in earnest in the late 1990s.

Since then, companies with little or nothing in the way of UK operations have increasingly become a feature of the index after securing LSE listings.

Miners have led the charge. The likes of the Kazakhstan-focused Kazakhmys, Vedanta Resources (operates in India, Zambia and Australia) and Fresnillo (based in Mexico) now stand shoulder to shoulder with UK-centric blue chips such as Marks & Spencer. David Hobbs, a director of FTSE, the body that compiles the index, says it is wrong to view their arrival as a rupture with the past, however.

“The FTSE 100 has never been and was never intended to be a representation of the UK economy,” he says, pointing out that constituent companies have always drawn much of their turnover from overseas.

Corporate nationality can be hard to pin down in any case. British Airways, for instance, will be part of a new company incorporated in Spain after it merges with Iberia.

Mr Hobbs and his colleagues recently had to decide if shares in this new entity could still be part of the FTSE 100. They provisionally decided that it could because of “investor perception” and a likely London bias to post-merger trading.

A thumbs-down from FTSE, which is owned by the Financial Times Group and the LSE, would have been a blow to BA as there is still an international marketing cachet to being a part of the FTSE 100.

“It’s a recognition,” says Anil Agarwal, the controlling shareholder and executive chairman of Vedanta, which listed in London in 2003 and entered the FTSE 100 in 2006.

Membership of the index also means that some institutional investors are obliged to hold a company’s shares. This can be controversial, given that the newcomers are sometimes deemed to be riskier bets.

Richard Lambert, director-general of the Confederation of British Industry, thinks the influx from overseas has not left UK-focused businesses starved of capital, however.

“UK plcs raised an enormous amount of equity last year,” he says.

Edmund Shing, European equities strategist at Barclays Capital, says the current composition of the FTSE 100 shows the maturity of the London market, even though the prominence of miners (see table) increases the index’s volatility by linking it more to commodity prices.

The absorption of companies such as Essar Energy certainly chimes with the desire of many London investors to increase their exposure to emerging markets and shun the sluggish UK economy.

Many international companies are drawn to listing in London because of the depth of the pool of investors. An extra attraction for foreign businesses is the relatively flexible approach to corporate governance.

In the case of the miners, immigration has also become self-reinforcing. As the more mining groups listed, the more the City deepened its sector-specific expertise – such as specialist analysts and bankers – which in turn pulled in more businesses.

“We have now become the centre for mining in the world even though there are no mines in Notting Hill,” boasted one prominent London banker.

Some overseas-focused FTSE 100 members may have only a token UK office. But they have still been a substantial source of fees to local bankers, lawyers, accountants, public relations firms and company secretarial services.

Shallow local roots can also deepen into a substantial presence, as proved by SABMiller. The brewer, then South African Breweries, listed on the London Stock Exchange in 1999.

It now employs about 30-40 at its London head office and about 480 in the UK overall. But Graham Mackay, chief executive, recalls a very different set-up initially: “When we first came over to list it was three of us and a filing cabinet.”

On Part two: who owns the FTSE 100?

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