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All change in the markets

As major companies such as M&S, which was ejected from the FTSE 100 last week, stumble, it’s important to consider the rapidly rising businesses too.

As major companies such as M&S, which was ejected from the FTSE 100 last week, stumble, it’s important to consider the rapidly rising businesses too.

by
John Redwood

in Features

11.09.2019

Free enterprise has plenty of births of new companies and plenty of deaths or declines of older ones. If you own shares in a fund investing in a main index like the S&P 500 in the US or the FTSE 100 in the UK, the index does the investing for you. It throws out the companies that are declining and picks up the larger companies that are growing fast. The Index of larger companies is an investor in success and a seller of companies in relative decline. Active managers setting out to beat the index have to place bigger bets than the index on the winning areas.

We are living through massive changes in the way business is run and in the type of goods and services people want to buy. The digital revolution is sweeping aside lots of traditional products and services, replacing them with digital variants. Out goes the CD and the tape and in comes the music download. Out goes the typewriter and the pen, in comes the smart phone and the smart pad. Out goes film and in comes digital photography. The cinema comes to your living room and you can shop from your armchair. There are other revolutions underway. The health revolution is changing approaches to smoking, drinking, exercise and eating. The drive to cut carbon dioxide is seeking to move people off petrol and diesel and into electric vehicles. It is changing the way electric power is generated too.

Change to survive

Sometimes very large companies pick up these changes and adapt themselves in time to the new trends and requirements. A leading cigarette manufacturer states its aim now is to “transition” customers to “products that are significantly less harmful than combustible cigarettes”. Large oil companies are turning to investment in renewables and low carbon power, accepting the wish to move away from too much reliance on the oil they have been producing for many decades. The oil companies are busy putting electric charger points into filling stations, knowing that they will collect less revenue from each electric car when it stops than they currently do for each petrol or diesel vehicle.

Sometimes large successful companies do not implement the changes quickly enough to maintain profitability and scale. We saw this last week with M&S in the UK leaving the FTSE 100 index because it is no longer one of the top 100 companies by valuation. The conventional retail sector has been squeezed by the arrival of online competitors offering good prices and the advantage of home delivery. Companies have also faced more intense low cost discount competition in both food and clothes where M&S concentrates its efforts. Many well-known UK retail names have gone from the FTSE 100 in recent years. Some have been bought up or merged with other businesses, some have declined in profitability and a few have gone bankrupt. Debenhams, House of Fraser, Mothercare, BHS, Asda, Argos and WH Smith are amongst the names that no longer appear as independent FTSE 100 companies.

Upstarts matter

The rapid change in fortunes can sometimes confuse people about the underlying strength of an economy. The relative decline or even the bankruptcy of an older business model or a particular company approach does not necessarily mean that entire sector is struggling or the economy as a whole is weak. It tends to be the better known companies that decline because they have been around longer and have reached a bigger size. It is often the less well known newer companies that are growing fast and stealing their business. These days there is, as well, the challenge of the new leviathans, the large digitally-based companies such as Amazon, which spread into a wide range of business areas and take turnover away from more traditional businesses. They have global reach and more name recognition than the old brands they are replacing. Today as well more of the people with ability to spend on discretionary items are opting for services, events, leisure and pleasure rather than goods. This too affects the balance of economic life and the relative fortunes of quoted companies.

We are staying with our view that the world economy will avoid recession, whilst continuing to witness a nasty manufacturing downturn. More stimulus measures should be on the way from governments and central banks.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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