Sharky
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Came across this interesting article by share site DigitalLook.com which explains why the regular quarterly reshuffle of shares in the leading FTSE 100 and FTSE 250 indices is something you need to know about:
If you thought there was a lot of money riding on football teams fighting for relegation and promotion think again.
Football clubs may lose out on tens of millions of pounds in TV revenues if they are dumped out of the Premiership – but quoted companies can lose hundreds of millions of pounds from their market value if they are dumped out of the elite FTSE 100 index of leading shares.
Every three months FTSE Group - the independent group which controls the main UK stock market indices – sits down to decide who has made the share price grade.
The FTSE 100 index is made up of the largest quoted companies in the UK. Stock market heavyweights and household names such as oil giant BP, mobile phone group Vodafone and drugs group GlaxoSmithKline currently top the list of the UK’s largest companies and are assured of their place among the stock market elite. For example BP currently has a market value of more than £92bn.
However, as you go down the list the competition to stay in the FTSE 100 can be intense. And being a household name doesn’t guarantee your survival.
The self styled world’s favourite airline British Airways lost its position in the FTSE 100 in the last reshuffle in September after a titanic struggle that went down to the wire on the last day of trading in one of the closest relegation battles for years.
It is not just the FTSE 100 where your league position matters. Companies in the FTSE mid-250 index – the next largest 250 quoted companies in the UK - are also involved in an ongoing promotion and relegation tussle.
Why does it matter?
The simple answer is that there is lot of money to be made and lost by the FTSE decisions - and the quarterly reviews are closely followed by active investors and fund managers in the City.
The logic is simple. Billions of pounds are invested in the group of leading shares by funds that specifically track the FTSE 100 index. When a company drops out of the FTSE index these funds are no longer required to track it and sell. Similarly if a company is promoted to the FTSE index then the tracker funds need to rush to buy it.
There are also plenty of funds that specialise in tracking the FTSE 250 shares – so the same rule of thumb applies here.
Tracker funds are acutely aware that they need to track the right shares, and don’t want to leave it to the last minute to buy shares as this could prove costly if there rivals are also bidding up the price for stocks.
So fund managers will regularly review the current stock market form of those companies that could face the drop or make the cut and try and predict which way the tide could turn.
Of course experienced traders know that the trackers have to act and that this will have an impact on share prices – so they to watching and predicting share price movements.
In other words the FTSE reshuffle is a self-perpetuating investor phenomenon. Investors know it will have a major impact on share prices and therefore try and react to this – thus causing the price movements they predicted.
How does it affect share prices?
All this trading activity has some important implications:
- If a company is likely to get promoted to the FTSE 100 and FTSE 250 then fund manager buying could propel its share price upwards.
-Similarly if a company is likely to get relegated it could propel the share price downwards further and seal the stock’s fate.
- Trading in promotion and relegation candidates can be very heavy, especially in the run-up to a quarterly review.
-This means that the share prices of these stocks can be more volatile than normal during this crucial period.
-If a promotion or relegation is unexpected then you could see a sudden share price movement after the decision is announced.
-If a promotion or relegation goes down to the wire like British Airways and is too close to call then similarly you could see share price swings.
-Interestingly once a company has been promoted or relegated it may come under very different stock market pressures. Investors will be asking if a new promotion candidate will be able to make the grade over the long term or will go straight back down again.
-Similarly those companies that were relegated by the smallest of margins may actually see a positive impact on their share price over the coming months as investors back them to be promoted again.
These share price movements are an important consequence of the FTSE reshuffle, let alone the corporate pride and ego attached to being in the club of the UK’s largest companies.
Some examples
In the last review shares in packaging group Rexam, engineer Tomkins and Alliance Unichem were promoted to the FTSE 100 index, while British Airways, EMI and International Power were relegated.
Lets take Rexam as an example. Shares in the group had a very strong run-up in August, thanks partly to promotion hopes as trackers and investors sought to buy the stock. But since then have had a mixed ride.
At the time of writing it is ranked 103 in the list of the UK’s shares, and its FTSE 100 position remains on a knife-edge – although a good trading statement could have secured its safety.
Meanwhile following a difficult year after the September 11 atrocities, British Airways had a dreadful share price run during the second half of August and early September. This condemned it to the FTSE 250 by a whisker. But now it is knocking on the door of the FTSE again – ranked 107 in the list of largest companies.
How does it work?
FTSE Group carries out its regular review on a set date every three months. Its decisions are governed by a strict set of ground rules.
The next review for the FTSE 100 and FTSE 250 indices is scheduled for Wednesday 11 December.
The market value of companies are taken from the closing price on the day of the review. Then usually several weeks after this date the companies officially leave their respective indices.
There is some leeway to allow for common sense decisions ie a company has to fall significantly down the rankings before it is ejected.
In the last review British Airways and music group EMI had fallen to 111 and 114 respectively.in the largest companies list.
For the promotion candidates they usually have to be significantly higher than being ranked 100 ie Rexam and Tomkins were ranked 90 and 92 respectively.
Usually three companies are promoted and three companies are relegated. FTSE International also publishes a reserve list,which outlined potential companies that could make the FTSE 100 or mid-250 if necessary ie an existing index constituent is taken over or de-lists.
Who is in the frame this time?
With the FTSE reshuffle upon us again – investors are already taking bets on the promotion and relegation candidates.
Here is a run-down on the contenders:
Relegation contenders for the FTSE 100
Corus
The steel group looks a certainty to get the chop after unveiling a poor trading statement, the collapse of its Brazilian merger and troubles selling its aluminium business.
Schroders
The fund manager has been hit by concerns about an outflow of business. A recent statement which suggested things were not getting any worse may not be enough to save the group.
Canary Wharf
The collapse in the office market due to City job losses has seen the group’s market value fall sharply.
Alliance Unichem
An impending Office of Fair Trading review into pharmacy prices has cast a shadow over the group.
Xstrata
Brokers have produced a mixed reaction to the mining group’s shares, which has clouded its stock market prospects.
Tomkins
The engineering group has recently admitted that trading has been bad due to poor markets.
Promotion contenders for the FTSE 100
British Airways
It could be a quick return to the FTSE 100 for British Airways after a recovery in its share price and some recent positive comments from joint broker Merrill Lynch.
Liberty International
Chairman Donald Gordon tries to achieve his ambition of getting the retail property specialist into the FTSE 100 by buying up huge amounts of shares over the past month.
Other potential candidates:
Leisure specialists Rank Group, pub and restaurant chain Whitbread, sugar group Tate & Lyle and lending group Provident Financial.
Some handy hints
It is important to be aware how the FTSE reshuffle can have a major impact on share prices. Here are some handy hints:
-Previous research shows that the average quarterly return of shares entering the main FTSE 100 index have outperformed in the previous quarter so keep a close eye on those potential promotion candidates.
-Watch out for a bounce back in shares if they have been oversold and fallen out of an index.
-Index tracking can be a very useful tool for investors looking at short-term returns and volatility. For longer-term investors it is also important to carry out research into the company to gauge if it has the potential to maintain its FTSE 100 position.
If you thought there was a lot of money riding on football teams fighting for relegation and promotion think again.
Football clubs may lose out on tens of millions of pounds in TV revenues if they are dumped out of the Premiership – but quoted companies can lose hundreds of millions of pounds from their market value if they are dumped out of the elite FTSE 100 index of leading shares.
Every three months FTSE Group - the independent group which controls the main UK stock market indices – sits down to decide who has made the share price grade.
The FTSE 100 index is made up of the largest quoted companies in the UK. Stock market heavyweights and household names such as oil giant BP, mobile phone group Vodafone and drugs group GlaxoSmithKline currently top the list of the UK’s largest companies and are assured of their place among the stock market elite. For example BP currently has a market value of more than £92bn.
However, as you go down the list the competition to stay in the FTSE 100 can be intense. And being a household name doesn’t guarantee your survival.
The self styled world’s favourite airline British Airways lost its position in the FTSE 100 in the last reshuffle in September after a titanic struggle that went down to the wire on the last day of trading in one of the closest relegation battles for years.
It is not just the FTSE 100 where your league position matters. Companies in the FTSE mid-250 index – the next largest 250 quoted companies in the UK - are also involved in an ongoing promotion and relegation tussle.
Why does it matter?
The simple answer is that there is lot of money to be made and lost by the FTSE decisions - and the quarterly reviews are closely followed by active investors and fund managers in the City.
The logic is simple. Billions of pounds are invested in the group of leading shares by funds that specifically track the FTSE 100 index. When a company drops out of the FTSE index these funds are no longer required to track it and sell. Similarly if a company is promoted to the FTSE index then the tracker funds need to rush to buy it.
There are also plenty of funds that specialise in tracking the FTSE 250 shares – so the same rule of thumb applies here.
Tracker funds are acutely aware that they need to track the right shares, and don’t want to leave it to the last minute to buy shares as this could prove costly if there rivals are also bidding up the price for stocks.
So fund managers will regularly review the current stock market form of those companies that could face the drop or make the cut and try and predict which way the tide could turn.
Of course experienced traders know that the trackers have to act and that this will have an impact on share prices – so they to watching and predicting share price movements.
In other words the FTSE reshuffle is a self-perpetuating investor phenomenon. Investors know it will have a major impact on share prices and therefore try and react to this – thus causing the price movements they predicted.
How does it affect share prices?
All this trading activity has some important implications:
- If a company is likely to get promoted to the FTSE 100 and FTSE 250 then fund manager buying could propel its share price upwards.
-Similarly if a company is likely to get relegated it could propel the share price downwards further and seal the stock’s fate.
- Trading in promotion and relegation candidates can be very heavy, especially in the run-up to a quarterly review.
-This means that the share prices of these stocks can be more volatile than normal during this crucial period.
-If a promotion or relegation is unexpected then you could see a sudden share price movement after the decision is announced.
-If a promotion or relegation goes down to the wire like British Airways and is too close to call then similarly you could see share price swings.
-Interestingly once a company has been promoted or relegated it may come under very different stock market pressures. Investors will be asking if a new promotion candidate will be able to make the grade over the long term or will go straight back down again.
-Similarly those companies that were relegated by the smallest of margins may actually see a positive impact on their share price over the coming months as investors back them to be promoted again.
These share price movements are an important consequence of the FTSE reshuffle, let alone the corporate pride and ego attached to being in the club of the UK’s largest companies.
Some examples
In the last review shares in packaging group Rexam, engineer Tomkins and Alliance Unichem were promoted to the FTSE 100 index, while British Airways, EMI and International Power were relegated.
Lets take Rexam as an example. Shares in the group had a very strong run-up in August, thanks partly to promotion hopes as trackers and investors sought to buy the stock. But since then have had a mixed ride.
At the time of writing it is ranked 103 in the list of the UK’s shares, and its FTSE 100 position remains on a knife-edge – although a good trading statement could have secured its safety.
Meanwhile following a difficult year after the September 11 atrocities, British Airways had a dreadful share price run during the second half of August and early September. This condemned it to the FTSE 250 by a whisker. But now it is knocking on the door of the FTSE again – ranked 107 in the list of largest companies.
How does it work?
FTSE Group carries out its regular review on a set date every three months. Its decisions are governed by a strict set of ground rules.
The next review for the FTSE 100 and FTSE 250 indices is scheduled for Wednesday 11 December.
The market value of companies are taken from the closing price on the day of the review. Then usually several weeks after this date the companies officially leave their respective indices.
There is some leeway to allow for common sense decisions ie a company has to fall significantly down the rankings before it is ejected.
In the last review British Airways and music group EMI had fallen to 111 and 114 respectively.in the largest companies list.
For the promotion candidates they usually have to be significantly higher than being ranked 100 ie Rexam and Tomkins were ranked 90 and 92 respectively.
Usually three companies are promoted and three companies are relegated. FTSE International also publishes a reserve list,which outlined potential companies that could make the FTSE 100 or mid-250 if necessary ie an existing index constituent is taken over or de-lists.
Who is in the frame this time?
With the FTSE reshuffle upon us again – investors are already taking bets on the promotion and relegation candidates.
Here is a run-down on the contenders:
Relegation contenders for the FTSE 100
Corus
The steel group looks a certainty to get the chop after unveiling a poor trading statement, the collapse of its Brazilian merger and troubles selling its aluminium business.
Schroders
The fund manager has been hit by concerns about an outflow of business. A recent statement which suggested things were not getting any worse may not be enough to save the group.
Canary Wharf
The collapse in the office market due to City job losses has seen the group’s market value fall sharply.
Alliance Unichem
An impending Office of Fair Trading review into pharmacy prices has cast a shadow over the group.
Xstrata
Brokers have produced a mixed reaction to the mining group’s shares, which has clouded its stock market prospects.
Tomkins
The engineering group has recently admitted that trading has been bad due to poor markets.
Promotion contenders for the FTSE 100
British Airways
It could be a quick return to the FTSE 100 for British Airways after a recovery in its share price and some recent positive comments from joint broker Merrill Lynch.
Liberty International
Chairman Donald Gordon tries to achieve his ambition of getting the retail property specialist into the FTSE 100 by buying up huge amounts of shares over the past month.
Other potential candidates:
Leisure specialists Rank Group, pub and restaurant chain Whitbread, sugar group Tate & Lyle and lending group Provident Financial.
Some handy hints
It is important to be aware how the FTSE reshuffle can have a major impact on share prices. Here are some handy hints:
-Previous research shows that the average quarterly return of shares entering the main FTSE 100 index have outperformed in the previous quarter so keep a close eye on those potential promotion candidates.
-Watch out for a bounce back in shares if they have been oversold and fallen out of an index.
-Index tracking can be a very useful tool for investors looking at short-term returns and volatility. For longer-term investors it is also important to carry out research into the company to gauge if it has the potential to maintain its FTSE 100 position.
