FTSE 100 reshuffle as Russian mining companies move in

6th December 2011

Barring last minute surprises, two Russian mining companies – and an Irish buildings material group – will move into the index while two South African companies and a UK-based satellite systems firm will depart.

The entry of the Russian miners is controversial – passive index tracking funds will be forced to buy the stocks in their exact percentage in the total FTSE 100 – pushing up prices that have already seen substantial gains over the past month.

Who are the new FTSE 100 companies?

Evraz is a steel making group associated with Chelsea FC owner Roman Abramovitch. It has a market capitalisation of some £5.3bn at the current share 405p  price – up from 320p just two weeks ago. Index tracking funds are unhappy about the free float – the number of shares available to investors outside the company's directors and other substantial shareholders. This stands at 23.8% – compared to a usual 25% for FTSE entrants, although this figure has been ignored on a number of occasions, with some firms offering a free float of under 20%.  .

Over 70% of Evraz shares are held by nominee company Lanebrook. Representing a number of Russian oligarchs, this company is registered in a suburban residential street in Stanmore, north London. Abramovitch owns a 33% stake in Evraz. 

Polymetal is a Russian silver and gold miner which will join the FTSE 100 this week. Its shares have risen substantially since a month ago, pushing up the price against index-tracking funds which will have to buy into the stock. It has a market value of £3.9bn

Its main shareholders are Czech billionaire Petr Kellner's investment group PPF, Nesis family investment group IST and billionaire Alexander Mamut. But unlike Evraz, Polymetal is making 50% of its stock available as a free float so there is a possibility of a more even distribution of buyers and sellers than with a narrower free float.

Russian and Kazakh miner Polyusgold was slated recently as a FTSE 100 entrant but its price has slipped. Polyus plans a free float of just 20%, putting it into the same controversial area as Evraz and prompting more anger from passive investment funds. If it does make it into the top 100 this time around, it could displace UK investment firm Hargreaves Lansdown, currently worth £2.2bn.

But the third new FTSE 100 entrant is set to be Irish building materials group CRH.  It has a market capitalisation of £8.8bn.

The two Russian miners will replace South African miner Lonmin, worth £2.15bn, South African-based asset manager Investec, with a £2bn value, and UK based satellite firm Inmarsat.

Why are investors concerned?

The Association of British Insurers, whose members own 20 percent of the UK stock market – including many index tracking funds – has previously expressed worries that firms enter the FTSE 100 too easily. It wants to put would-be entrants under closer scrutiny, both over whether the price has been inflated prior to entry into the index and over corporate governance issues for these foreign controlled companies.

ABI members are worried whether the rules best represent the interests of ultimate savers and investors as the current regime can force index-tracking funds to buy stocks they would prefer to shun on liquidity or governance grounds or both.

They accept that index trackers cannot choose –  but they are lobbying for a three month cooling off period between index entry and the need to purchase the shares. This would allow the price to settle down – blowing away any index pre-entry froth.

The industry is looking in particular at whether free float requirements for FTSE entry should be raised to prevent newly-quoted companies joining the index at inflated prices, due to lack of available shares, exposing investors to early losses.

In October, Karina Litvak, head of governance at F&C Asset Management wrote to the Financial Times to say the FTSE 100 "has progressively admitted a disproportionate share of extractive companies based in jurisdictions where rule of law is often called into question" – and small free floats "raise fresh concerns about the rigour of the listing process".

But many fund managers are happy to invest in mining companies – whether from the former Soviet Union or elsewhere. Thanks to still strong commodity prices, the inclusion of natural resources firms in the index has helped propel it higher than it might otherwise have been.

 

More from Mindful Money:

IPO – Initial Public Offering or Investors Put Off

Facebook – Would you take a punt on its IPO?

Could the Putin factor put investors off Russia?

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34 thoughts on “FTSE 100 reshuffle as Russian mining companies move in”

  1. Ian_jones says:

    So the alternative is to print money to transfer wealth from creditors to debtors? How does this fix things as long term rates will rise to offset once the panic subsides meaning no growth for a very very long time.

    1. Dave S says:

      Precisely – you can’t fix the unfixable. The Spanish so-called economy pre-crash was almost entirely based on a ponzi property market fuelled by cheap debt. 

      Without these ponzi gains there is no growth in domestic consumption and no growth in tourism as that was largely funded by the proceeds of other European ponzi property markets..

      If you print you will get inflationary growth with real incomes still dropping (as in the UK) – how can you get a service economy to grow with real-incomes dropping ? It won’t come from service exports – even the UK with its premium service sectors ran massive trade deficits in the boom years.

      So what can you do ? Try to get the ponzi scheme going again or except that the West has irretrievably damaged their economies. We will pay the price with much lower living standards

      1. The_forbin_project says:

         unfixable ?  maybe  but here’s one answer

        the whole of the Euro zone to default – yes that includes Germany!

        well the Germans wouldn’t  have it  I know  but the rest  could and as they are  majority voting block …..

        there may be a few “Argentitian ” problems with markets and other countries but once all the debt has been eradicated  then in 10 years time it will be all forgotten

        the second plan would be a Marshall plan mkII  for southern Europe  with the proviso that Germany sets up their fiscal policies and polices them for them

        naw, they’re not going to accept that either

        third way – a really BIG boot to kick the can…..

        Forbin

        1. Dave S says:

          Debtors default, spose they will anyway even if its called inflation. Will serve the stupid creditors right – teach them a lesson – but our own banks and our pension funds and in places like Italy, their own citizens hold the govt debt and I spose the stupid foreigners won’t lend to us for a while. Guess in the meantime we just print  but then thats what we are doing now…………….

      2. Anonymous says:

        Agreed about living standards, they are going to fall all around. Not such a disaster though, as we managed quite well a decade ago and it’s that kind of adjustment that’s needed. As for the famous ponzi scheme, just watch southern Europe. One false move and they will be at it again, ‘it’ being the construction of unnecessary housing stock. Even before the present stock is sold. It’s all that they can do, just about everything else is done better by competitors.

        1. Dave S says:

          Well I think the adjustment might be more like several decades worth of “growth” and with our demographics I’m not sure it won’t just keep on falling.

          Ok – our parents/grandparents survived but the problem is society expects living standards to improve not go backwards. I think the younger and future generations might not be so understanding.

          1. James says:

            you have out your finger exactly on the problem. An economy that stays the same size with an ageing population with vast debt is not an appetising prospect. By the time that you have taken out all those extra health care costs for the elderly and retirement incomes, the effect on youth could be very severe (they might, for example, have to pay Uni fees and get into debt or be unable to afford houses and that list is going to get longer).

          2. Anonymous says:

            Hi James

            Population structure is an expanding section/concept in economics for obvious reasons. Edward Hugh who has done much good work in this area put it like this.

            “It is by now well known that the main hope for developed societies subject to rapid population ageing who wish to maintain their relative standard of living lies in increasing their collective productivity more rapidly than they increase their dependency ratio via-a-vis the older age groups.”

            Now we are seeing dependency rising with production and productivity falling. So a “lost decade” type scenario poses lots of problems for any countries which get stuck in it.

  2. Nemesisforpredators says:

    “If it’s not too late for collective action to halt the systemic runs, time is certainly running out. The question is whether the euro’s members are up to the task.”
    Anyone wanna bet on who’ll be the first to jump ship?
    It won’t be the crew – they were never on board – it’s a drone remote-controlled from Wall Street and the City. In view of its years of exquisite failure you could even imagine they programmed it to crash. 

    1. Anonymous says:

      Hi Nemesis

      What do you think they would have gained out of programming the Euro to crash?

      1. Nemesisforpredators says:

        If they always perceived the european economy as a threat to the hegemony of the US dollar and Wall Street and the City (which would be consistent with their history), that would be sufficient to motivate the creation of a trojan horse to crash the Euro since its beginning.

        1. Nemesisforpredators says:

          Further,

          – Remember their collective and individual incompetence defies belief, stumbling as they are from crisis to crisis.

          – Remember they’re desperately out of their depth in debt themselves.

          – Remember they’re experts at offshore, off-the-books, over-the-counter, derivative and otherwise hidden or over-sophisticatedly incomprehensible operations.

          – Remember they’re losing the financial accumulation initiative to the asian economies.

          – Remember they’re shamelessly unscrupulous speculators on the backs of rest of the world.

          – Remember they’ve locked themselves in to a watertight pressurized financial cocoon and think they have no need to listen to anyone, that their own individual interests are the only sacred thing.

          – Remember they have a long long record of insatiable misbehavior since Andrew Jackson said in 1834:

          “…you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.”

          – Count the number of ex- Washington, Wall Street and the City personnel involved in leading roles in the present debacle.

          – Remember their lobbies pour billions into corruption of the democratic system and dilution of regulation which anyway always tries to shut the gate after the horse has bolted due to deliberately inadequate resources.

          – Remember they create wars and debt out of lies, thin air and the blood and labour of their children just to finance their military-political-financial network just to finance their bloated gated communities life-style. They have “failed to pay their workmen…lived on earth in luxury and self-indulgence, fattening themselves in the day of slaughter”.

          Can you be surprised that they would seek over the long term to crash any and every obstacle to their global domination? Rather, based on their past behavior, would you not expect it to be their norm?

  3. Andy Zarse says:

    Hi Shaun

    So much for Spain, I’ve just got back from five days in France spent at the Le Mans 24 hour car race which I’ve attended for many years. It’s almost become an economic “barometer” for me. All totally unscientific but a few things I noted:

    1. Fuel costs in France vary considerably, with some well above the UK price and some below.
    2. I have never seen the roads in NW France so quiet, the cost of using the payeage is really pretty high and more French were taking the backroads. I think the French are really feeling the pinch. The 120 mile drive from Le Mans to Rouen we literally didn’t see a French car, it was extraordinary.
    3. Local visitor numbers to the race seemed to be well down though not so much from the usual 80,000 British who annually attend. The French generally seemed much more low key this year.

    I don’t remember you doing very much on France’s economy, now may be a good time to examine her figures.

    Thanks

    Andy

    1. JW says:

       Hi Andy
      Our part of France, next to Switzerland is still doing well, as I believe are most south eastern regions. I think if you look at which regions had a majority voting for Sarkozy its a pretty good correlation to economic activity. Le Mans and most north western France is Hollande territory.

    2. Anonymous says:

      Hi Andy

      Whilst France has rarely crept to the top of the list -there is so much competition these days- she has done so once or twice. Here is a link for you.

      http://www.mindfulmoney.co.uk/wp/shaun-richards/frances-combination-of-an-economy-slowing-fast-and-further-austerity-means-she-faces-a-difficult-2012/

      The Le Mans numbers are interesting. It used to be a type of weekend out for many in the City (like the Monaco Grand Prix) so perhaps there has been some reining back. Although these days in perhaps something of an irony there are plenty of French in the City….

  4. Anonymous says:

    Hi Shaun Re : blame on those in charge ” in the Euro zone”. Having read the staff reports of the IMF for Greece which actively dissuade Greece from default and exit and ENCOURAGE deflationary internal devaluation notwithstanding known societal inflexibilities, I would ask some pointed questions of Lagarde and crew.

    1. Anonymous says:

      Hi Shire

      Well the Head of the IMF  Christine Lagarde is of course French and I was reading a report by its Chief Economist the Frenchman Olivier Blanchard on Latvia earlier today. So perhaps a rather similar crew are at the top of the IMF!

      The previous head of the IMF was Dominique Strauss-Khan….

      A Euro takeover?

      1. Andy Zarse says:

        I’m assuming the Latvia report shows they’re “on track” once again, just like Portugal the other week? I similarly assume the track is the AC/DC one again…

  5. JW says:

    Hi Shaun
    As you have pointed out many times this cannot be solved by replacing old debt with more new debt. The banking sector in the northern countries have to be made solvent by recapitalisation and bankrupcy where necessary. Bad loans have to written off and then money has to be GIVEN not LOANED to the southern countries to repair their economies. The German ‘mantra’ of ‘we did it the hard way so you have to’ will not work across sovereign boundaries. All we get is perpetual crisis and zombie households, banks and countries.
    Will the German’s do it? I think there is less chance than England winning the Euros. So we have years and years of this, until the ‘drip drip’ effect on Germany itself becomes too much and she decides to take her ball home. The external factor that could well accelerate this process is a fall in activity in the States coupled with a China hard landing. This will hurt in Germany and could prompt them to de-couple quickly. 

    1. JW says:

       Thanks Shaun for that brilliant Python link yesterday.
      I came across the attached yesterday courtesy of Richter , its an amusing sketch by two Australian comedians on the EZ.
      http://www.testosteronepit.com/clarke-and-dawe-european-debt

      1. Rods says:

        Hi JW,

        The video was a good find. Many a true word said in jest :-))

      2. Anonymous says:

        I did enjoy Nietszche being booked for dissent “thats 3 out of 4 games now”….

    2. Anonymous says:

      Hi JW

      Well there is now a little more chance of England winning than when you typed that :)…

      More seriously it is often ignored that Germany has its issues with its own Landesbanken and has done its own can kicking in this area. They could have set a much better example than they have and it is my opinion that fears for what they may have to pay towards their own banks have coloured their views on other countries. Or to put it another way Germany has her weaknesses too.

  6. William says:

    “the total amount of domestic bad loans is now 153.78 billion Euros and rising.” – yikes!

    It looks like the Fed are gonna announce Operation Twist 2.0. It won’t help Obama win reelection tho, because whatever the Fed does, the economy will still sink come November.  I guess that’s the thanks you get for halting the Great Recession in its tracks. Just ask Gordon Brown!

    P.S. I almost enjoy reading the titles of your blog posts as much as i enjoy reading the articles themselves.

    1. Anonymous says:

      Hi William and welcome to my part of the blogosphere.

      Financial markets have convinced themselves that the FOMC will dish them up a tasty morsel tomorrow.  If so I suspect it will be a type of QE3 and new outright asset purchases rather than Operation Twist 2. There is now a shortage of short dated bonds to sell to purchase longer dated ones meaning that at current rates only an extra 3 months or so is possible before they run out. Oh and does anyone really believe that Operation Twist has achieved much?

  7. James says:

    Shaun excellent as ever. I think that you may have missed M Barroso’ s speech yeseterday in which he said that:
    1. Europe is not compacent
    2. The European solution is working just fine
    3. He doesn’t need lessons from anyone.
    When a towering democratically elected leader such as Barroso tells us it’s ok, we are in safe hands, as I am sure that you will agree. He says it’s all under control, so who are we peasants to query the great man?

    1. Anonymous says:

      I guess here I live up to my trade name or non de plume of notayesman and point out he is wrong on all 3 counts!

  8. Robert S says:

    Shaun,

    We’ve all been hearing in the last few days that the length of time that Ireland & Greece have to pay back the bailout money, maybe lengthened.  Can you, or anyone else, explain how increasing the time to pay back the money will help the two countries?  I presume it means that their “monthly payments” will decrease which I’m guessing helps.  However, I can imagine that by extending the time period that today’s youngsters will possibly be paying for the current problems way in to the future.Thank you.

    Robert

    1. James says:

      I think that this is one of those questions that assumes that the structure is well thought through and designed to see all the debt paid off. As far as I know, all countries are still running deficits, so will not be able to pay off debt except by refinancing through further bond issues or borrowing from IMF/ECB/ troika etc. I assume that, by the troika setting longer time frames for being repaid, there is a longer window before more bonds have to be issued. Of course, like everything else here, this is just another attempt to kick the can down the road, as we wil end up owning this long dated debt, which will never be repaid.

      1. Anonymous says:

        To revert to musical themes, can I suggest ‘to our
        childrens, childrens children’.

        Unlike most of the musical references this is a LP, not a
        single, so it lasts much longer.  Even
        the group, the Moody Blues, have a name well in keeping …..

         

        Joking apart (?), many thanks for the effort Shaun.  Very much appreciated.

    2. Anonymous says:

      Hi Robert

      In essence here the Euro area is adopting the model of Ocean Finance! Have they also said “one simple monthly repayment” ? Things look more affordable when you extend a loan as monthly repayments fall but the total amount you have to pay rises.

      So this is another example of can kicking where they are hoping for economic growth and progress to help them out. Also they are hoping for inflation to reduce the debt in real terms whilst the relevant populations will be hoping for real wage growth to make it genuinely more affordable..

  9. Phwill77 says:

    Shaun
    would it ever be possible for the euro and world governments to pass a law that banks (given that they are so interlinked already by selling so much to each other) to be responsible to each other in terms of their debt, ie they would be completely self funding and not require any external support.
    Just a mad thought

    1. Anonymous says:

      Hi Phwill77

      I think the catch here is that the banks then would only be beholden to themselves and they would demonstrate how quickly money could be debased. Who would trust them?

  10. Rods says:

    Hi Shaun,

    Another really excellent blog.

    I see the rise in Spanish sovereign debt interest rates is now also affecting borrowing rates for Spain’s blue chip companies. So how long will it be before there are fire sales of Spanish companies and industrial assets at bargain basement prices to companies or countries that have lots of money like Germany and China? I think Spain is going to be a classic example for Economists on the dangers of asset bubbles and their subsequent deflation when coupled to a fixed exchange rate mechanism of the Euro which is directly linked to Germany productivity.

    The Euro situation seems to be following very much the Gold standard problem of the 1930’s. The US was blamed then because of the wall street crash and are being blamed now because of the sub-prime crisis. I think then as now the US were the instrument that lanced the boil, but they aren’t responsible for the contents within! The Euro coupled with excessive Government spending building deficits, sovereign debt, asset bubbles and very poor central bank performance coupled with poor bank regulation.

    Now I think the EU commission will totally crash and burn Southern Europe economically, by continuing to kick the can down the road, for as long as possible, so they can keep their jobs, perks and pensions for as long as possible.

    Part of the reform of banks and their bonuses is bonuses being paid in shares and placed into a escrow account with claw back rules. There is talk of this being extended to all public companies, so pay is really performance related and with greater share holder powers on executive pay.to try and re-couple it with the real world where it has become totally decoupled.

    Now, personally I think the same has happened with Western democracy and where politicians try to outbid each other by bribing the electorate with their own money (taxation) and other peoples (deficit spending) (Emperor spending in this way was also a major cause of the fall of the Roman empire, so nothing new). To re-couple democracy and politicians with the electorate, then part of their salaries and pensions should also be held in an escrow account with claw back facilities. Performance would be based upon PPP, liquid assets (savings and pensions), Government deficits and debt per person, Inflation targets, Educational qualifications (with international comparison, to stop mark inflation), crime rates, lifespan and health markers. So if the electorate gain during Governments duration and up to 5 years afterwards, the politician gains, if not they lose along with the population. The economic performance would obviously apply to senior central bank officials, so no more big inflation proofed pension pots as a reward for bad performance. Other elements would apply to individual ministers and their portfolios.

    Another disconnect are their sheets of lies, sorry manifestos, at election time, again pay should be dependent upon them implementing what they are promising, with a Force Majeure safety net.

    These comments are not meant to be political, but how senior officials performance should be directly coupled to rewards with no more reward for failure.

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