The Footsie failures

Share prices have collapsed during the credit crunch, but the UK's benchmark indices understate the true havoc that's been wreaked upon the value of our largest companies. Nikhil Kumar reports

The FTSE 100 Index continues to slide, as the UK stock market closes in on its Iraq war low of March 2003. From its subsequent peak of 6,732 on 15 June 2007, it slumped to close at 3,512 last night – a bruising decline of almost 48 per cent. There have been ups and downs along the way, but London's benchmark equity index has headed inexorably downwards. First, the credit crunch took a bite out of the banking sector, then the so-called commodities super-cycle unspooled, and finally debt – no matter how healthy the company – became a dirty word.

However, the headline decline of the FTSE 100 tells only half the story: regular reviews ensure that the worst-performing companies fall out. As the graphic on the right illustrates, if the make-up of the index had remained constant over the past two years, the picture would have been much, much worse.

Like a once glorious cricket squad whose time has passed, most of the companies that took the index to its peak now look harried and worn. Big hitters such as Northern Rock are living off state benefits, while others, including ITV, Enterprise Inns and Punch Taverns, have been relegated to the more modest FTSE 250 index of the not-so-blue chips.

"It's dropped like a stone," James Montier, the widely followed equity strategist at Société Générale, said of the index. "It's dropped and it's not had a fun time of it, which is not surprising because we've had a bursting credit bubble. One of the hallmarks of a credit bubble is excessive leverage, and a lot of FTSE 100 companies were certainly guilty of that."

The banks, unsurprisingly, have been amongst the hardest hit. Besieged by the rising tide of souring sub-prime loans and structured credit products that turned toxic with astonishing speed, Northern Rock was nationalised while Alliance & Leicester and Bradford & Bingley – part of which remains in public ownership – were unceremoniously wedded to Spain's Santander.

Of the remainder, the Royal Bank of Scotland is down by about 96 per cent since June 2007. HBOS was down 93 per cent before its takeover by Lloyds TSB, which itself was down 92 per cent before the combined group began trading earlier this year. Insurers were caught in the downdraft, with Old Mutual losing 79 per cent and Legal & General easing by 78 per cent.

Mike Trippitt, the banking analyst at Oriel Securities, said that although the first signs of credit crunch stress coincided with the market's peak in the summer of 2007, the picture didn't become clear until the end of the year.

"Whilst HSBC warned on sub-prime lending at the at the end of 2006, it wasn't until June 2007 that we saw fuller disclosure on sub-prime loans, which began to affect the wholesale funding markets," Mr Trippit said.

"But we didn't see those markets lock up until September that year, when Northern Rock failed. And still at that point we were barely through the problems. The writedowns on structured products at the end of 2007 brought the impact on capital values and the need for more capital at the banks to the fore, which, along with the Northern Rock failure, really affected the shares."

A growing aversion to debt has been a key factor behind some of the other big fallers. Pub companies Punch Taverns and Enterprise Inns are down 97 and 93 per cent respectively, buckling under the twin pressures of a consumer slowdown and large debt piles. Along with Mitchells & Butlers, the two are now ranked in the FTSE 250. "They've been over-geared for a number of years and as the concern attached to that has grown, they've been hit," said Mark Brumby, the leisure analyst at Blue Oar.

Yell, the directories group which has also been demoted, has been hit by similar concerns over its borrowings, falling by an eye-watering 96 per cent.

Debt and a collapse in the property market has affected Wolseley, the construction materials group, which is down 88 per cent. The UK-focused housebuilder Persimmon has fared better, losing 71 per cent of its value, but was booted out of the index all the same. At present, not a single UK housebuilder merits a place among the blue chips.

A tougher economic picture has also been hard to bear for media companies, which have been hit by sharp falls in advertising revenue. Daily Mail & General Trust, down 71 per cent, and ITV, down 79 per cent, both left the FTSE 100 as their market values declined.

Likewise, retailers have suffered as shoppers tightened their purse strings, with DSG International declining by 88 per cent and Marks & Spencer losing 65 per cent. Even Whitbread, the hospitality group which has often been hailed as a success despite the economic rout, is down 62 per cent as investors limit their exposure to discretionary spending.

Unlike the banks and those companies with too much debt or too much exposure to parts of the economy suffering the most, mining and oil and gas groups fared well until last summer. Leading stocks tracked the price of oil and metals such as copper, platinum and iron ore, which touched intoxicating highs last year.

Still, in the end, the sector veered off the rally path as prices fell on the prospect of a slump in industrial demand. The dollar, which strengthened as investors withdrew from the banks and sought cover by parking their cash in US Treasuries, didn't help matters. The price of oil, for example, is now at about $40 per barrel, well off its record high of $148 in July last year.

As a result, the platinum miner Lonmin is down about 77 per cent from the market's peak, while Xstrata and Kazakhmys have shed 82 per cent of their respective values on the stock market. Of the oil stocks, Royal Dutch Shell is 32 per cent weaker.

And what about the handful of winners? Well, the vast majority of gainers since the summer of 2007 are companies that got gobbled up by buyers before valuations really began to tumble. Those buyers have since had mixed fortunes.

Of the two companies in the black since June 2007 and still trading independently, investors in BG have most reason to be pleased – the stock is up 11 per cent. British American Tobacco, which gained as investors turned defensive, is the only other winner, up 2 per cent since the peak.