A little extra help with windfall decisions

It is all getting a bit boring, this demutualisation lark. Last week Norwich Union, this week Halifax. Soon, Woolwich. It makes you wonder how we occupied our time since serious privations came to an end.

Halifax is interesting, though. This is a serious flotation - one that will change the shape of the UK equity market. Not for Halifax waiting until the autumn before entering the FTSE 100 share index. No, Halifax goes in within the next few weeks, as befits an important financial plc.

Of course, its members cannot believe their luck. Back at the turn of the year, pounds 4 looked a reasonable price for Halifax shares. Today, unofficial dealings suggest that pounds 7 is more likely to be the price at which they enter the stock market. Quite an uplift if you are on the receiving end.

What is just a little surprising is that these Halifax beneficiaries are proving to be just as willing to take the money and run. Around a quarter of all Halifax shares will become available as members opt to sell through the pre-float auction. And this despite all the warnings published in the media that it was wiser to hang on. In the end, availability of stock can only help the aftermarket, but there may be a moral there for short-term investors.

I have explained the situation before, but new readers should now concentrate. Halifax is about to become a bank, quoted in the banking section of the FTSE Actuaries All-share index and part of the FTSE 100. Many professional investors run their portfolios using indexation techniques, either passively - aiming to mirror the performance of the market as a whole - or actively, trying to ensure the shape of the funds they run match the index in some measure. These managers go overweight in sectors that look attractive and put less than the average into those expected to underperform.

Professional investors know the banking sector is increasing dramatically in size this year, with Alliance & Leicester, Halifax, Woolwich and Northern Rock. The FTSE 100 will become heavily financials oriented. Worried they will not get enough shares in companies where the ownership is vested in private hands, these indexed fund managers have been buying other banking stocks as a form of insurance until they know if they can lay their hands on sufficient Halifax shares.

This has pushed banking share prices up, raising the value of the banking sector in the index. In turn, it means Halifax shares are expected to start at an even higher price, exacerbating the risks attached to being out of this part of the market. Sort of perpetual motion, financial style.

If it sounds like a bubble about to burst, it is. True, the banking sector has a fair share of followers anxious to cash in on the continuing consolidation in the high street. But the outperformance is beginning to drive ratings to a point where valuation levels may be unsustainable. In the short term it does depend to some extent upon Joe Public's willingness to release shares into the market, but if the windfall is worth 40, 50 or even 60 per cent more than originally anticipated, that looks increasingly likely.

Halifax may mark the end of the banking ramp. By all means wait to watch the pinstriped sheep build their weightings as the flotation becomes a reality, but my view is not to wait too long. This may well be the last carriage in this year's demutualisation gravy train to surprise with the extent of its reward.

If it isn't demutualisations, it is privatisations. The reporting seasons for the water companies is well and truly upon us, so whoever in the Treasury is trying to determine the best way to calculate the windfall tax, they will have lots of figures to go on.

Strange that windfall should be used in this context as well. In the case of the converting building societies and insurance companies, the windfall seems to be something for which members have not necessarily asked (unless you include the ballot) but which is coming anyway and represents an unlocking of intrinsic value on a once and for all basis.

The windfall tax on the utilities is altogether more contrived and could be calculated on a basis quite divorced from profitability or fairness. But until we see just what Mr Brown has in mind, this is still a sector to avoid.

Brian Tora is chairman of the Greig Middleton investment strategy committee and may be contacted on 0171-655 4000.