FTSE Reshuffle: Abrdn, Hikma and Howden to exit FTSE 100

What is the FTSE reshuffle?

The FTSE 100 represents the 100 most-valuable publicly-listed companies in the UK, while the FTSE 250 is made up of the next 250 largest companies. Both of these indices are reviewed once every quarter by provider FTSE Russell, which calculates the valuations of UK companies to decide which stocks should be in which index. This sees some companies relegated and others promoted from their indices.

 

When is the FTSE index review?

The latest reshuffle is set to become effective when UK stock markets open on Monday September 19. However, as UK stock markets will be closed for the Queen’s funeral, this looks set to take place when they reopen on Tuesday September 20.

Importantly, relegations and promotions are based on market capitalisations of each individual company at the end of play on August 30.

 

How does the FTSE reshuffle work?

In order to join the FTSE 100, a company must have a market cap that would place it in the top 90 largest stocks on the UK stock market. Any existing member of the FTSE 100 that sees its valuation fall below the top 110 companies in the stock market is booted-out and relegated to the FTSE 250.

That means the FTSE 250 has additions made at both ends. The most valuable firms in the index are promoted to the FTSE 100 and replaced by those that are relegated from the FTSE 100. Meanwhile, the least valuable firms are booted out of the index altogether and replaced by new entrants. Any company that sees its value fall below the top 375 UK companies is ousted from the FTSE 250 and joins the FTSE SmallCap index, while any companies that boast a value in the top 325 stocks join the FTSE 250.

 

FTSE 100 reshuffle

Exiting FTSE 100	Entering FTSE 100
Abrdn	ConvaTec Group
Hikma Pharmaceuticals	F&C Investment Trust
Howden Joinery Group	Harbour Energy

 

FTSE 100 relegations

Abrdn, which rebranded itself last year from Standard Life Aberdeen, will lose its blue-chip status after falling over 42% in 2022, significantly underperforming the wider market. Asset management has been hit hard by the selloff this year, and Abrdn continues to report large outflows of cash while efforts to lower costs are taking longer than anticipated.

Hikma Pharmaceuticals is down 43% since the start of the year as profits have fallen due to tough comparatives and weaker pricing for its generic drugs, which prompted it to cut its full year outlook in August.

Howden Joinery Group’s life as a blue-chip stock was short-lived considering it only joined the FTSE 100 earlier this year. The kitchen supplier and DIY outlet was propelled into the big leagues after business boomed during the pandemic. It has kept up the momentum considering sales and profits have continued to grow and remain well-above pre-pandemic levels this year, but that has not stopped it being caught-up in the selloff as fears about a pullback in discretionary spending grow.

 

FTSE 100 promotions

ConvaTec Group shares are up over 16% in 2022, an impressive performance considering the FTSE 250 lost over one-fifth in value. The company, which makes medical devices such as catheters, has been pivoting toward sustainable and profitable growth this year and has said it is aiming to grow faster than its peers. It decided to withdraw from non-core hospital activities in May and then entered the faster-growing biologics market by purchasing Triad Life Sciences to strengthen its position in the advanced wound care market in the US.

F&C Investment Trust shares have lost ground this year after suffering from depressed equity markets, but it has suffered a milder decline than the wider market and rallied over 20% during the two months to mid-August, enough to push it into the FTSE 100. The company has a diverse investment portfolio mostly angled toward the US. Its private equity investments have helped counter the drop in public markets and it has signalled that dividends will continue to grow going forward.

Shares in Harbour Energy, which was created by the merger of Chrysaor and Premier Oil in 2021, have popped by over 64% since hitting 30-month lows in early July and are worth over one-third more than at the start of 2022. The oil and gas company has reaped rewards from higher prices, enough for it to pay its maiden dividend and launch a share buyback. Plans to be debt free in 2023 also paints a rosy picture for future returns. Its ability to continue cutting production costs this year, even amid the inflationary environment, has allowed it to capitalise on the rise in energy prices, even if its hedging programme continues to be a hindrance in the current environment.

 

FTSE 250 reshuffle

Exiting FTSE 250	Entering FTSE 250
ConvaTec Group	Abrdn
F&C Investment Trust	Hikma Pharmaceuticals
Harbour Energy	Howden Joinery Group
Chrysalis Investments	Bluefield Solar Income Fund
Greencore Group	NextEnergy Solar Fund
Provident Financial	PureTech Health
Tyman	Twentyfour Income Fund
XP Power	Warehouse REIT

 

FTSE 250 relegations

Chrysalis Investments has plunged over 73% in 2022 and currently trades at all-time lows. The company, which invests in UK and European private companies and counts the likes of buy-now, pay-later outfit Klarna, Starling Bank and payments firm Wise on its books, has seen its net asset value take a hit this year as fears around inflation and rising interest rates has hurt the value of its holdings.

Greencore Group shares are down over 35% in 2022 and hit levels not seen since 2013. The convenience food maker has seen sales continue to rise this year thanks to both higher volumes and prices, although inflation threatens the outlook and it has warned it will remain a challenge into 2023. It plans to recover any lost profitability from inflation going forward and is on course to post a significant jump in earnings this year.

It has been an extremely tough few years for Provident Financial, which closed its doorstep lending business after 141 years in 2021 and transformed itself into a ‘specialist banking group’. The company has fallen from grace since joining the FTSE 100 back in 2015 before falling into the FTSE 250 in 2017. Shares have halved this year and linger near two-year lows.

Tyman will exit the FTSE 250 after losing almost half of its value this year with shares trading at two-year lows. The company, which makes components for windows and doors like handles and locks, has grown sales, profits and dividends this year but growth is slowing at a time when the housing market appears to be cooling down, placing pressure on the outlook with profits forecast to decline in 2022 following the double-digit rise seen in 2021.

XP Power, which makes critical power systems, has fallen 64% this year and hit levels last seen in 2017. The company has been caught up in the selloff of tech and semiconductor stocks and has suffered from component shortages, supply chain problems and Covid-19 disruption in China. Demand has remained strong, but it is facing a tough time delivering and has taken a cautious view to its outlook, warning it could miss expectations because of the limited visibility available.

 

FTSE 250 promotions

The FTSE 250 will welcome two renewable funds during this reshuffle, with Bluefield Solar Income Fund and NextEnergy Solar Fund both rising to multi-year highs in 2022 as the spike in energy prices has lifted their net asset values this year.

TwentyFour Income Fund invests in less-liquid but higher-yielding asset-backed securities in Europe. The fund has fallen around 9% this year but has still outperformed the market, with sentiment rising as its portfolio will benefit from rising interest rates.

Warehouse REIT has also outperformed the market despite finding itself in negative territory this year, although it rallied during the rebalance period in the third quarter. The last-mile warehouse investor has grown the value of its portfolio to over £1 billion in less than five years.

Biotech firm PureTech Health, which makes medicines for serious diseases, has rallied over 68% since hitting four-year lows in the middle of June and will join the FTSE 250 after listing back in 2015. It delivered ‘stellar’ results from a trial of a new schizophrenia drug and it hopes to replicate the success here by applying its methods to discovering new drugs for other ailments. After all, it claims its clinical research is ‘six times better than the biopharma average’.

 

Why is the FTSE reshuffle important?

Stocks that are moving down the list of the UK’s top 350 most-valuable companies are, for one reason or another, falling out of favour and underperforming while those moving up the ranks are typically gaining momentum and outperforming the wider market.

A study by Smith’s Corporate Advisory suggests a stock that is bumped-up into the FTSE 100 rises around 15% on average in the two months leading up to the day of the reshuffle and go on to add another 2% between the move being confirmed and it becoming effective. Interestingly, they fall by around 5% on average in the two months after joining the index.

At the other end, those that fall out of the FTSE 100 drop by an average of around 19% in the two months leading up to the reshuffle and also gain 2% by the time it becomes effective, while staying broadly flat in the subsequent two months.

The reshuffle also dictates what funds a stock is included in. For example, a passive fund that tracks the FTSE 100 will no longer invest in a stock that is relegated into the FTSE 250. This means that many funds will rejig their portfolios to take the latest movements into account, which in turn can influence how the impacted stocks perform.

Reputation is also at stake. Stocks in the FTSE 100 are known as ‘blue-chip’ stocks, which are the biggest companies generally regarded as among the most financially secure and highest quality businesses. Meanwhile, those in the FTSE 250 are known as ‘mid-cap’ stocks that have medium-sized valuations. This means it can impact how each individual stock is viewed by the market.

 

When is the next FTSE reshuffle?

The next FTSE reshuffle will take effect when UK markets open on Monday December 19, based on valuations when markets close on Tuesday November 29.

 

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