What is the FTSE index review?
The constituents of the FTSE indices are reviewed every quarter, in March, June, September and December. This ranks all of the members of the FTSE 100, FTSE 250 and FTSE SmallCap indices by their market cap to determine what companies should be included in what index.
Any member of the FTSE 100 that ranks 111th or below on the day of the review is automatically demoted to the FTSE 250, and replaced by the FTSE 250 companies that have moved up the list to rank above 90.
Those FTSE 250 members that fall below a ranking of 376 are ejected from the index and replaced by companies in the FTSE SmallCap index that have moved above 325 on the list.
Importantly, the review is also a time when any new listings are taken into account. If a company has gone public since the last review and is big enough to qualify for an index, then it will be included.
Why is the FTSE index review important?
The FTSE index review is important for those stocks that are affected by the shake-up as it determines what index they sit in.
This can impact their appeal to institutional investors and pension funds that may only invest in stocks in a particular index. For example, if a stock falls out of the FTSE 100 then it also falls off the radar of any investors exclusively focused on that index and replaced by whatever stock is promoted from the FTSE 250. This is particularly true for those stocks that fall out of the FTSE 250 as they lose their place among the UK’s largest companies altogether.
FTSE Index Review: stocks to watch
The latest review was based on the market caps at the close of trade on March 2. The changes will come into effect on March 22.
What stocks are entering the FTSE 100 from the FTSE 250?
Two stocks are being promoted from the FTSE 250 and joining the FTSE 100.
Weir Group is returning to the FTSE 100 after being ejected back in 2015. Weir Group shares have recovered strongly since suffering heavy falls when the pandemic hit and have more than doubled in value over the past 12 months.
The company provides engineering services to a variety of markets but 80% of income comes from the mining industry that has benefited from higher commodity prices over recent months, and this has flowed through to Weir. For example, Weir’s largest exposure is to the copper market, which has seen prices jump over 17% since the start of December. The rise in price of other metals like gold and iron ore has also encouraged miners to increase spending.
In March, the company said it was aiming to outperform the wider market over the next three years by delivering mid-to-high single-digit revenue growth and expanding its margin by 2023 to help it reinstate dividends that were suspended in 2020.
Engineering company Renishaw is being promoted to the FTSE 100, but it is unclear how long it will remain in the index considering it put itself up for sale in early March after its founders announced they wanted to sell their shares in the company.
Renishaw shares have doubled in value over the last year and touched a new all-time high in February. David McMurty and John Deer, the company’s chairmen and both now in their 80s, plan to sell ‘substantially all’ of their 53% stake in the company they founded in 1973.
For now, shareholders are tentatively waiting for bids to come in to discover how much their holdings are worth.
What stocks are entering the FTSE 250 from the FTSE 100?
Two stocks are being ejected from the FTSE 100 and falling into the FTSE 250.
Morrisons is being ejected from the FTSE 100 and pushed into the FTSE 250 after seeing its share price suffer during the pandemic. Although supermarkets have been one of only a handful of retailers that have been able to operate uninterrupted during the last year, adapting to the pandemic has not been cheap. In fact, Morrisons spent £290 million in 2020 on coronavirus-related measures, from hiring new staff and covering increase sick days for employees.
This means sales have held up but that profits have been squeezed. This has been the case with its peers but Morrisons, being the smallest of the Big Four supermarkets, is the one paying the price by losing its place in the top index.
Water company Pennon Group doesn’t make many headlines. It’s a defensive stock operating in tightly regulated market that provides predictable and stable revenues, profits and dividends. Pennon, which owns South West Water, quickly recovered after stock markets took a battering when the pandemic erupted last year as investors fled to stocks that offered some safety, but shares have gradually lost value since June as appetite for stocks with a bigger risk-reward profile returned.
What stocks are being promoted to the FTSE 250?
Three stocks are being promoted to join the FTSE 250.
Dr Martens, the famous maker of iconic boots, launched an IPO in January that valued the company at 370 pence per share, or £3.7 billion in total. The company did not raise any new funds but existing shareholders sold £1.3 billion worth of shares into the market.
The company has performed well since listing, with shares now trading at 466p and boasting a value of £4.7 billion, making it big enough to enter the FTSE 250.
Bytes Technology is another new addition to the market that has performed well since going public in December. Having priced its IPO at 270 pence, shares now trade north of 410p to give the company a market cap of £985 million.
Bytes Technology was demerged from South African tech firm Altron (and still holds a dual-listing in Johannesburg) and provides software, security and cloud services to public and private sectors around the world. The company said on March 17 that it expected to beat expectations when it releases its annual results for the year to the end of February 2021 in late May or early June.
Chrysalis Investments invests in private and public companies with experience in small and mid-cap UK equities. It is also particularly active in the UK IPO market, having invested in firms like The Hut Group. Other investments include in Starling Bank, buy-now pay-later firm Klarna, and members-only travel platform Secret Escapes.
Chrysalis Investments shares have increased 2.7x fold over the past 12 months, fuelled by growing valuations for firms like Starling and Klarna, and raised equity in March to help it fund further investments in renewable energy, fintech, e-commerce, Software-as-a-Service, and in new IPOs.
It changed its name from Merian Chrysalis Investments in December, when Merian Global Investors changed its name to Jupiter Asset Management, which manages the company’s £7 billion of assets under management.
What stocks are being excluded from the FTSE 250?
Three stocks are being ejected from the FTSE 250.
NextEnergy Solar Fund
NextEnergy Solar Fund is exiting the FTSE 250 after its shares stagnated over the past year, dipping 2.8%. The company invests in solar farms and has continued to provide steady and stable performance over the last year, delivering a higher net asset value and dividend in its latest interim results, but, like Pennon, shares have lost appeal as investors turn to riskier assets.
BMO Commercial Property Trust
BMO Commercial Property Trust is falling out of the FTSE 250. The company’s core portfolio contains UK commercial properties such as offices, shops and industrial sites and it also has some leisure sites, residential properties and student housing on its books.
Demand has fallen for commercial property during the pandemic as lockdown rules prevent many shops and offices from reopening. Rent collection has therefore suffered but it has performed well thanks to stronger performances from areas like factories and warehouses.
Petrofac shares have more than halved over the last year and currently trade at fresh lows, which will see it pushed out of the FTSE 250. The company, which constructs and manages vital infrastructure for the energy industry, has struggled during the pandemic as it depressed demand for oil and spending by its customers.
However, recent pressure has been applied to shares by events in the United Arab Emirates. A former employee of one of its subsidiaries has admitted to the UK Serious Fraud Office that they broke the UK Bribery Act. Although no charges have been made against Petrofac itself, it has caused problems after one of its customers, ADNOC, suspended the company from bidding for new work but let it continue to work on existing contracts.
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