It wasn’t the fact that the new information technology sector finally received its own London stock market sector on All Fools Day last week that was so significant, but that it was also Maundy Thursday. This is not only the day that the Queen traditionally hands out alms, but also the day that the Church of
Rome teaches us is the time to wash the feet of poor people.
The new classification has all the bread-and-circuses condescension of the FTSE International, jointly owned by the Stock Exchange and Pearson, providing tit-bits for the masses, while washing the feet of a London equities market that could have done with an invigorating makeover.
For reasons best known to those who run it, the London Stock Exchange has long been unwilling to provide the IT sector with its own classification. It’s only the amazing success of the IT sub-sector during 1998 that appears to have persuaded those wise owls to provide a separate and identifiable sector, along with the euro indices that are launched this month. The constitution of the sector, however, is vapid and, I’m afraid, deserves the judgmental British cliché: “too little, too late”.
The sector is split into two constituent sections, Software & Services, and Hardware, which in turn will be split into six mini-sectors: Hardware, Software, Services,
Internet, Telecoms Equipment and Semiconductors. Not only are these hazardously different in size but, more importantly, there will be only one index tracking the whole sector’s performance. So, the institutional tracker funds – all the rage over the past year or so – will not be picking up the mini-sectors individually.
Investment bank Granville, which kicked off the whole reclassification process a couple of years ago with a survey of fund managers that defined sectoral demand, is among those that question whether there is much science to the allocation of stocks to particular sectors.
For example, encryption software producer Zergo, which has a market capitalisation of about 90m riding on a share price that has rocketed in typical Internet fashion from 180p to some 800p, has been classified in Support Services, according to the FTSE, when it is clearly an Internet security stock.
On balance, Zergo might prefer to sit it out. Membership of the Internet sub-sector of the new index is hardly something to boast about. As Groucho’s City brother might have asked, would you want to be a member of an index that contained only seven listings and which enjoys a total market capitalisation of less than 300m – a value that would barely get you noticed on fund management screens? Hardly reflective of the vibrant growth sector that the Internet is meant to represent.
The overwhelming temptation is to conclude that the UK investment scene has not yet bought into the technology sector. This would not matter so much if rival capital markets had been similarly complacent. But they have not been.
By contrast with the FTSE in London, the American exchange NASDAQ boasts more than 70 e-commerce or related companies, and its European equivalent, EASDAQ, has attracted flotations in a way that the London Stock Exchange has not.
This is not the formula for the UK capital markets to tackle American hegemony – which should be what the new FTSE IT classification is all about.
There has been much made of late of the virtues of the UK looking west to the US for its economic growth rather than east to
Europe. This Little England isolationist attitude does not stand up to the most superficial examination of what is already occurring on the continent.
The Neuer Markt in Germany and Le DeuxiÃÂ¨me Marché in France are recent manifestations of how seriously the rival European capital markets are taking growth sectors of the equities markets. With the Unlisted Securities Market and, more recently, the Alternative Investment Market, London has a tradition of not getting it quite right.
Given that we have a common language with the US, this is unacceptable. Now that a pan-European market in equities is developing, it’s perfectly possible for the UK to be the hub of markets fed by American capital. And because our own IT markets are often leading the way out of what has become known as Silicon Fen around Cambridge, there is no reason why we shouldn’t be dominating the markets.
Instead, we face a situation where American capital could by-pass the UK to feed the prosperity of the German and French economies instead. And it’s immensely galling to see this process occur with the tacit co-operation of FTSE International.
On the positive side, I suppose we can say that last year’s IT sub-sector, which was the tentative first step towards a full classification, provided a spur to investment in the UK industry and the new full classification should do likewise. But this is something of a post-rationalisation. We seem to be starting from a low base of expectations and find comfort in the market’s potential, rather than current opportunity.
It may be that the new IT sector in the UK, as defined by FTSE, grows into a throbbing equities market. But, if it does so, it will be more a tribute to the industry than to the people who run the market.