London’s FTSE 100 is ‘substantially concentrated’ as regulator frets over volatility possibility
Thursday 10 October 2024 3:34 pm
The UK stock market is “substantially more concentrated” than Europe or even the US, analysts beget warned, as regulators be anxious over the clustering of the ideal British stocks on London’s FTSE 100.
In a speech earlier this week, Financial Behavior Authority chief executive Nikhil Rathi warned that market concentration became once main to a “sharp rise in volatility and ensuing possibility”, noting that lawful 10 companies represented almost 50 per cent of the FTSE 100’s price.
“This heavier reliance on fewer companies come disruption – from earnings, legislation, or geopolitics – can day out the global market,” Rathi warned in his speech earlier this week.
This atmosphere poses challenges for stock pickers as they are pushed to beget an overweight pickle in the halt stocks in deliver to outperform the major market.
“Actively managed funds beget struggled to outperform high-heavy indexes across many fairness markets in fresh times, as they blueprint now not beget sufficient publicity to the largest stocks, both thanks to restrictions on security level concentration or, as importantly, ensuing from they strive to differentiate themselves from the underlying index in deliver to generate excess returns,” said Michael Born, an funding study analyst at Morningstar.
“Focus in a pair of names with an outsize contribution to returns poses a possibility to diversification and would possibly wait on herding behaviour, with energetic managers below tension to make investments in the halt names on danger of missing out on returns,” Born added.
Open air of the halt 10 stocks, handiest 30 per cent of the FTSE 100 beget beaten the major market since January 2022, in accordance with recordsdata from Morningstar.
Born said the UK market is turning into increasingly more concentrated ensuing from it’s carefully weighted to miners, banks, and oil majors, which beget performed thoroughly over the final two years as price stocks fell back into favour.
This has also contributed to a rise in the concentration of dividends, with lawful 10 FTSE 100 companies forecast to pay out 55 per cent of dividends for the interval of 2024, while the halt 20 pay out 71 per cent.
“Traders wants to be attentive to the relative stage of concentration possibility for the interval of the UK’s headline index,” said AJ Bell funding director Russ Mould.
The FCA currently mandates that funds can now not beget more than 10 per cent of their portfolio in a single maintaining, as well to struggling with holdings that each fabricate up more than 5 per cent of a fund’s belongings exceeding 40 per cent when blended.
This ‘5/10/40’ rule has prevented UK funds from turning into too concentrated for years, however has come below fire in fresh times because the market strikes in direction of being dominated by larger avid gamers.
Terry Smith, the supervisor of the largest fund in the UK, described the rule of thumb final twelve months as a “headache”, complaining that it forces him to focal point less on turning in returns than shining the regulator.
Nonetheless, repealing this rule would possibly well result in stock pickers herding into the few largest companies, driving up their share label contrivance more and risking big ripple effects if even one starts to underperform.
Rathi warned about these ripple effects in his speech, noting that “a little blip can ripple across equities, mounted earnings, FX, commodities…or more now not too long in the past, crypto”.
He added that the FCA became once examining the dip in markets over the summer season after heart-broken US financial recordsdata sent global stocks plummeting to search out out “if there are original systemic dangers needing deeper examination”.
“Volatility per se is now not the issue and would possibly now not be conflated with systemic possibility. But excessive strikes, especially intraday, ensuing from runaway volatility that dislocate costs from fundamentals are the central issue,” he said.