Who will be the winners and losers from the FTSE 100’s reshuffle?
Imagine fighting relegation four times a year
Promotion and relegation is tough to bear but a necessary finale to the thrills and spills of a Premier League and Championship season. Fortunately the early occupiers of the current relegation places in the Premier League – Stoke, Newcastle and Sunderland – are so far from the season’s end that dreams of mid-table respectability or even Europa League are still alive. But supporters and chairmen should spare a thought for shareholders and CEOs of low-lying FTSE stocks, who battle relegation from the country’s premier share index no less than four times a year. The regularity of this ruthless stock cleansing is to ensure the FTSE remains a representative benchmark of the biggest stocks in the country.
Our stock pundit predictions
Picking football club relegation candidates at this stage of the season is beyond the skills of our unathletic investment team. However we feel more confident at identifying the most likely outgoing and incoming stocks to the FTSE’s quarterly reshuffle taking place early September.
Likely Winners – Berkeley Group
Britain’s booming property market benefits not only homeowners but also homebuilders like Berkeley Group whose share price has risen fourfold in the last five years and is the most likely new entrant to the FTSE 100. An improving economy coupled with the government’s help-to-buy program has fuelled demand for new homes, particularly in London and the South East where Berkeley happens to sell most of its homes for an average selling price in excess of 500 thousand pounds. The firm’s future share price is obviously very much tied to the health of the real estate market. Current developments include property hotspots such as One Tower Bridge, along the Thames in the heart of the city.
Berkeley Group Share Price Chart – 5 Year Performance:
Source: TD Direct Investing’s Advanced Trading Platform
Past performance is not a reliable indicator to future results.
Likely Losers – Weir Group
Oil rig engineer Weir Group has been slipping down the FTSE in tandem with the sliding oil price in recent months and we think it’s likely to fall out of the FTSE 100 index. We base our assumption on the fact that the firm’s market cap is currently well below the 100th placed cut-off point in the FTSE table. Plunging commodity prices are hitting the firm particularly hard as it means miners and oil operators spend less on pipelines, pumps, turbines and other heavy machinery manufactured by Weir Group. The Glasgow-based firm has taken to cutting jobs to improve profitability but its future fortunes are still very much tied to the prevailing direction of commodity prices.
Weir Group Share Price Chart – 5 Year Performance:
Source: TD Direct Investing’s Advanced Trading Platform
Past performance is not a reliable indicator to future results.
Promotion pros and cons
Stocks promoted to the FTSE 100 are automatically bought by index-tracking funds, potentially pushing prices higher in the first few days. But the flipside is that many active fund managers sell newly promoted stocks, preferring instead to buy the next small-cap growth story listed lower down the market-cap ladder in the FTSE 250 index of smaller companies.
Relegation is not all bad
Relegated stocks are of course automatically sold from tracker funds but can be picked up by bargain hunting fund managers at beaten-down prices. This time last year the homebuilder Barratt Developments fell out of the FTSE 100 at 360p before bouncing back to 670p and re-entering the benchmark at the turn of the year.
What action could investors take?
The FTSE reshuffle could be of interest to two contrasting types of investors: First, the so-called value investor looking to pick up fallen giants at knocked-down prices. At the other end of the scale, momentum investors could be looking to latch onto the coat-tails of new and upward-trending stocks flying into the FTSE 100.
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