FTSE Small Cap Collapse

The FTSE Small Cap Index[1] has nose-dived since September. A magnification of the falls on the FTSE 250, true. Yet this bares little resemblance to the Russell 2000 (the de-facto benchmark small cap index in the US). The Small Cap and Russell had tracked each others movements quite closely in recent years:

Russell 2000 vs FTSE Small Cap (5yr)

Key: RLT = Russell 2000, SMXX = FTSE Small Cap excluding Investment Trusts.

The divergence over the past three months is rather alarming:

Russell 2000 vs FTSE Small Cap (1yr)

Year-on-year the drop in the Russell 2000 is ~4% compared to >20% for the Small Cap! There are numerous possible reasons. I’ll posit a couple of those I favour.

1. Darling’s politically motivated attack on private equity via the 18% CGT rate could be partly to blame. Many long-term holders in smaller companies may well be locking in profits at the 10% rate. Crash Gordon’s pension raids have deflated the FTSE for the past decade so its no surprise Darling has carried on with the wealth-destroying traditions.

2. A realisation that Britain and sterling are screwed. While the US commentators are expecting a sharp “v” shaped recovery by late 2008 there seems to be no such relief for the UK. The UK is far more reliant on the property bubble, financial services and on the public sector gravy train. Anyone holding property or financial stocks already knows about the markets repricing. The public sector has gotten far too big and far too wasteful, a point reflected by Prof. Peter Spencer when commenting upon the latest government spending figures:

“What is really shocking about these figures is that they reveal that the Exchequer was running a large current deficit before the credit crisis hit home, when the economy was doing very well and it should have been showing a large current surplus”

This isn’t the place to have a rant about New Labour, but with the economy, or at least the perceptions of the economy, turning it is too late now. We’ve reached the top of the big dipper and the sudden dread of the fall to follow is beginning to dawn.

Evan Davis, while looking at the utterly meaningless trade deficit, opines:

The UK looks [as if] it has had more in common with the US than we thought.

Dear Evan, if only that were true!

[1] The FTSE Small Cap excluding Investment Trusts (ITs) is used in the charts as a more meaningful measure.


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