European Closing Update: Index Change Hits Some Blue Chips

Stoxx announces it will recalculate indices based on free float, not full market cap.
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LONDON -- Certain European stocks were hard hit on Tuesday as the firm that compiles the Stoxx indices, such as the

Dow Jones Stoxx 50 Index

, announced that at long last it would recalculate the indices to take into account only the constituents' free float (the percentage of market cap available to investors) and not the full market cap.

What this means is that passive or index-tracking investors, who previously were obliged to own a large proportion of the available supply, thereby increasing the scarcity of stock for other investors, will now have to reweight their portfolios accordingly.

The majority of shares to fall foul today were large stocks with a low free float and a full market cap weighting: read former incumbents such as

Deutsche Telekom

(DT) - Get Report

and

France Telecom

(FTE)

. Late in the afternoon, Deutsche Telekom was down 2.39 euros, or 4.1%, at 55.90 ($54.22) and France Telecom was down 7.62 euros, or 5.1%, at 141.14.

Gainers included

Nokia

(NOK) - Get Report

up 1.91 euros, or 3.5%, at 56.91,

Siemens

(SMAWY)

up 6.55 euros, or 4.0%, at 168.55 and

Total Fina Elf

(TOT) - Get Report

up 4.40 euros, or 2.7%, at 169.70.

Mark Howdle of

Schroder Salomon Smith Barney

, who described in a recent report that this issue is a "Damoclean sword hanging over some of Europe's largest stocks," believes that the companies that compile other indices such as

FTSE

and

MSCI

will follow suit within the next couple of months.

Therefore, Howdle argues, active investors should get much nearer to a free-float weighting in the stocks such as

Telecom Italia

(TI)

,

STMicroelectronics

(STM) - Get Report

,

Sonera

(SNRA)

,

SAP

(SAP) - Get Report

,

KPN

(KPN)

and

Swisscom

(SCM) - Get Report

, which would mean significantly underweighting them against an FTSE, MSCI or STOXX benchmark.

The result of all this meant most of Europe's other major stock markets were lower late in the afternoon, with the

CAC 40

in Paris down 39.4, or 0.6%, at 6,469.1, and the

Xetra Dax

in Frankfurt down 9.3, or 0.1%, at 6,949.7.

In London, with the absence of any U.S. influence, most U.K. investors sat on their hands and by late afternoon the

FTSE 100

was down 46.2, or 0.7%, at 6,424.2.

The most interesting stock was games publisher and developer

Eidos

(EIDSY)

, which surged 51.75p, or 10.6%, to 538.75 ($8.19) on reports the company that brought you

Lara Croft

is in early stage merger talks with

Infogrames Entertainment

, the French software group.

The pharmaceutical sector was less lucky as news emerged that

Glaxo Wellcome

(GLX)

will have to put warnings on its new drug Lotronex and brokerage

Charterhouse Securities

duly downgraded its sales forecast for the drug. Glaxo was down 42p, or 2.1%, at

19.78, and merger partner

SmithKline Beecham

(SBH) - Get Report

shed 18p, or 2.0%, at 889.5.