Footsie is looking lopsided - but tinkering would be unwise; STOCK MARKET WEEK

The composition of Footsie, the blue chip share index which is by far the most popular measurement of London shares, has changed dramatically in the past year.

The Thorn EMI, British Gas and Hanson demergers and the arrival of the former building societies Alliance & Leicester and Halifax have forced most of the constituent changes.

More are on the way. When the steering committee, which decides membership of what is one of the most exclusive clubs in the land, next meets it will have to throw out three more members.

For Norwich Union, the insurer, Woolwich, another former building society, and Billiton, the South African miner being spun off from Gencor, are of sufficient size to barge their way in at the first opportunity.

So the committee will have little choice but accept their membership and remove three of the lower capitalisation groups.

Footsie, of course, has in varying degrees been in a state of flux since it arrived in 1984, eventually replacing the old FT Index, which had just 30 constituents, as London's share barometer.

It has never aimed to mirror the overall stock market's performance. As it is, more or less, made up of the top 100 companies, based on their market capitalisations, it could never reflect the diversity of activities involved.

But over the years Footsie has become somewhat unbalanced. In recent times the strength of the financial sector has increased enormously. This is partly due to a growing fascination among institutional investors with the financial world. Such appreciation has, in varying degrees, been encouraged by the need of many funds to build their weighting in the financial sector.

Trackers funds and the like, which often exist merely to reflect Footsie, have anxiously added to their financial portfolios to make sure they were not too underweight when Alliance & Leicester and Halifax arrived. That process must continue with the debuts of Norwich and Woolwich and then some of the other converting societies.

So there seems little doubt that the financial contingent in the blue chip index is set to increase even more.

Guy Fisher at NatWest Securities points out that financial shares now account for 26.26 per cent of Footsie, with banks alone responsible for 20.5 per cent. In the all-share index financials make up 22.91 per cent with banks at 15.38 per cent.

It is when comparisons are made between Footsie and the FTSE SmallCap index that the growing power of financials is more starkly illustrated.

They account for just over 12 per cent of the smaller companies index, with general industrial shares representing 27.72 per cent. In Footsie, what could be called the remnants of Britain's former industrial might have only an 8.86 per cent representation.

As Mr Fisher points out: "These differences have had a significant influence on the performance of the two indices in recent times, with the banks performing well as a result of the building society flotations and takeover rumours and the industrials suffering due to the strength of sterling."

The banking strength has grown since the start of the 1990s, helped along by the arrival of the huge HSBC (the old Hongkong & Shanghai Banking Corporation) in 1992 as well as the more recent building societies influence.

The supporting FTSE 250 index, measuring the 250 shares immediately outside Footsie, is perhaps more evenly spread with financials contributing 13.17 per cent and general industrials nearly 30 per cent.

Footsie peaked after the Budget at 4,831.7 points, with derivatives activity largely responsible. The 250 index has gone nowhere for a long time. Its record was hit in March last year.

Indices do not stand still and by their very nature their composition is subject to frequent change. Footsie has never reflected the performance of the stock market as a whole - and under the present system it never will. Some sectors will always be doing better than others, if only relatively.

There is no doubt, however, that the growing financial influence is giving Footsie- and even the indices which flow from it, such as the combined Footsie and 250 index - a lop-sided look.

But calls for it to be "doctored" should be ignored. Although the financial sector is going to become even more powerful, it would be unwise to start tinkering with constituents, as happened with the old FT 30, to try to produce an alleged representative measurement.

As Footsie has soared to new heights, followers of non-Footsie stocks have had to watch their shares limping lamely behind. The under-performance among second and third-liners has been depressing. But there is a nagging suspicion that the neglect of the supporting players is about to end.

Blue chip valuations are, on many yardsticks, looking expensive. There is no doubt the bargains now lurk on the market's under-card. There have been suggestions that at least some of the cash-rich institutions are looking much more closely at smaller companies. If they are, then the yawning gap between Footsie and the FTSE SmallCap index could close dramatically.

The Budget has not gone down too well with market strategists. Some of the high-flying Footsie forecasts are looking vulnerable. The NatWest team admits to being "browned off" and sees under-performance continuing. It shoots for 4,600 at the year-end with 5,100 next summer.

Legal & General regards the market as "soundly based" and is on 4,700 for next summer. HSBC and Dresdner Kleinwort Benson forecast 5,100. Charterthouse Tilney can see little to cheer about for the rest of the year, with Footsie ending at 4,000. Its 1998 summertime forecast is 4,800.

Results this week include Somerfield, the supermarket chain, expected to produce pounds 103m against pounds 86.2m, and cider maker HP Bulmer, where around pounds 30m against pounds 25.5m is likely.

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