The big event in May for the London stock market was the IPO of Glencore (LON:GLEN). Many investors are unsettled about the logic of listing companies on the LSE that have little or no economic footprint in the UK. Indeed, some macro- investors make a point of obtaining their UK exposure through the FTSE 250 index rather than the FTSE 100 or the FTSE All Share because they feel it is less contaminated by overseas earnings. Quantifying Britishness is not easy. Is Catlin (LON:CGL) more British than Diageo (LON:DGE) ? Both are based in the UK and both make most of their money outside the UK. Even purely domestic companies like ITV benefit when overseas visitors watch their programmes.
The reality is that the UK, and especially London, is the offshore financial hub for Europe and has always been the prime destination for companies seeking to raise large amounts of capital. This applies especially to high risk equity capital for emerging markets and dates back to the nineteenth century when London provided funds for mines in South Africa and railroads in the USA. Glencore ticks both boxes with its exposure to commodities and to developing countries.
A more intricate argument exists around how much a fund should hold in the stock. Conventional market capitalisation trackers will follow the formulae used by FTSE to calculate its indices. That simply takes the market capitalisation of each stock (the number of shares multiplied by the share price) and divides it by the sum of the market capitalisation of all the other shares in the index. That means the higher the valuation the higher the weight. Allocating anything by price means you always end up spending more on the most expensive items
In other words it is like going into Tesco with £10 to spend on a mix of vegetables and ending up with a lot more asparagus than potatoes. Fine for footballers wives but illogical for most shoppers.
FTSE do make an adjustment to the figure it uses in its calculations to reflect the amount of stock that you are actually able to purchase. In a way it is a bit like adjusting your shopping basket to allow for the stuff on display that you can’t buy. In the case of Glencore…
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Rob Davies
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