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Movers and shakers

Financial Times: Movers and shakers

By Philip Coggan

Published: June 11 2005

Oil lived up to its “black gold” nickname in 2004. The surge in the crude price past $50 a barrel may have been a burden for motorists, but it allowed the corporate oil giants to climb the FT Global 500 league table (see page 28). Collectively, the oil companies on the list have added some $400bn to their market value since last year. ExxonMobil only just fell short of unseating General Electric as the world’s largest company, and there were significant advances up the table for BP, Total, ChevronTexaco, Eni, ConocoPhillips and Royal Dutch/Shell. The latter rose from 13th to seventh place, despite management changes in the wake of its overstatement of oil reserves.

What was good news for the oil sector ought to have been bad news for the rest of the corporate world. In the past, sharp rises in oil prices have been associated with economic recession. This time around, however, the surge in the price was arguably the result of a very strong year for the global economy, which kept demand for oil products high. The phenomenal growth of China was a key element. Accordingly, while the increase in the oil price (which was matched by advances in many other commodities) added to the corporate sector’s costs, businesses were able to shake off the effects. Profits were remarkably strong, thanks to buoyant demand and to improvements in productivity.

According to Capital Economics, US corporate profits have risen by 78 per cent since 2001, while the share of profits in US GDP has rebounded from a low of 7 per cent to 10.6 per cent.

With profits strong, businesses were able to rebuild their balance sheets and, in many cases, return cash to shareholders via share buy-backs and dividends. The most striking example was the $32bn special dividend paid out by Microsoft, the US software group, which by itself distorted the savings numbers for the US economy in the last quarter of 2004. That cash outflow was one reason why Microsoft dropped from second to third in the rankings (it was top two years ago).

Stock markets continued their recovery from the lows of March 2003, although not without the occasional wobble. The US Federal Reserve’s steady tightening of monetary policy meant that cash started once again to be a reasonable alternative to equities and bonds, something that was hardly true when US short rates were 1 per cent. There was uncertainty ahead of the US presidential elections, followed by a relief rally once it became clear a decisive result had been achieved.

The reasonably buoyant tone of markets means that the companies in the rankings have a higher average value than last year. The total value of our constituents is $18,947bn, up from $17,137bn in 2004. Last year, the 500th ranked company, Johnson Controls, had a market capitalisation of $10.9bn; this year, the backmarker is Ricoh, the Japanese electronics and electrical supplier, at $12.7bn.

The revival in business confidence also means that mergers and acquisitions are being undertaken once again. Some well-known names have, accordingly, disappeared from the list since last year, including Bank One (merged with JP Morgan Chase), Aventis (merged with Sanofi-Synthelabo), AT&T Wireless (merged with Cingular Wireless) and Abbey National, bought by Santander Central Hispano of Spain.

Other companies dropped out of the list for more prosaic reasons. Years of decline means that Marks and Spencer, once a byword of retailing excellence in the UK, no longer qualifies. Two stars of the telecom boom, Nortel Networks and Lucent Technologies, are also too small to make the rankings.

But there were few great corporate shocks along the lines of 2002, when Enron and WorldCom both went bust. Seventeen of the 20 largest companies are the same as last year, with only Procter & Gamble, Coca-Cola and Cisco Systems dropping down. American International Group’s travails, which saw the departure of its chairman and chief executive Maurice “Hank” Greenberg in the face of an investigation by New York attorney-general Eliot Spitzer, caused the insurance company to only drop from seventh to 16th place.

In geographical terms, the US still dominates the list, with more than 200 entries. Its preponderance has diminished over the years, however, in part because of the emergence of countries such as Russia and Saudi Arabia, and in part because of the dollar’s decline against other currencies.

Japan is still the second-best represented country in the rankings, with 44 constituents, but has lost almost a quarter of its membership over the past year, as the Tokyo stock market has continued to struggle. The UK is third in terms of constituents but second in terms of market value. France, Canada and Germany are next, in keeping with their status in the G7 group of the world’s largest economies, with Italy, Switzerland and the Netherlands the only other countries to have ten or more constituents. France this year joined the trillion-dollar club, with the combined value of its companies worth just over $1,000bn.

The upper reaches of the list tend to be dominated by the usual suspects from the US, UK, Switzerland and Japan. However, there are a few exceptions. Saudi Basic Industries, which has leapt more than 100 places to 22nd, is another beneficiary of the high oil price. The highest non-Japanese Asian company is Samsung Electronics of South Korea; its success in the mobile phone market has been such that investors are now assigning the group a higher value than Nokia, the traditional market leader.

In sectoral terms, the industry that stands out is banking. Like oil, it has its giants, with five companies having a market value of more than $100bn. But it is also a much deeper sector, with almost twice as many constituents in the rankings as the nearest competitor. The 74 banks on the list have a market value of over $3,000bn.

Banks have flourished over the past 20 years from a combination of low interest rates, booming asset markets and a rising demand for credit. The sector comprises about 35 per cent of US domestic profits. But there are serious doubts about whether such strength can be sustained. The low for short rates and bond yields in the US may have been seen and, even if bad debts start to emerge, the US public’s appetite for taking on further debt may start to diminish.

Meanwhile, the information technology sector continues to lose ground. In 2004, there were 33 IT hardware companies in the rankings, with a combined value of $1,203bn; this time round, there are just 24 companies, valued at $1,031bn. Overcapacity in some areas of the industry, combined with a reluctance on the part of corporate customers to launch new investment programmes, has made life difficult for the sector.

By next year, the rankings will have changed again. With parts of the global economy (notably Europe) losing momentum, and with companies tending to lower their guidance on future profits, the outlook appears rather cloudy. Some of our Global 500 will be attracting the wrong kind of headlines over the coming year.

Philip Coggan is the FT’s investment editor.

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