- Main contenders for promotion to the FTSE 100 are Marks and Spencer, technical products supplier Diploma, and drug makers Dechra and Hikma.
- Demotion contenders include catalytic converter maker Johnson Matthey, Abrdn, Persimmon and RS Group.
- The reshuffle will be based on closing prices on Tuesday 29August.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The competition for promotion to the FTSE 100 ison, with plenty of contenders jostling for a position in the topflight. The reshuffle of the index is based on companies’ total market capitalization at the end of Tuesday 29 August, with notification of changes after UK markets close on the 30 August, so there is still significant time for estimations to change. Rebalancing also depends on the free float factor – how many shares are readily available to be publicly traded in the stock market. There are also strict rules to stop a hokey-cokey scenario emerging, with the same handful of companies falling in and out every quarter. So, a company has to be in the top 90 by market cap to jump into the big league or to be demoted it has to be below the 110th largest companies by size. Even so Abrdn is set for an awkward dance back out of the index, after only rejoining in December, after being relegated this time last year. A place in the ‘blue chip’ index is considered important for the prestige it bestows on a company but also because it can affect how much money flows into certain shares. A passive fund which tracks for FTSE 100 won’t invest in a company that is relegated into the FTSE 250 so this can affect individual stock performance.
Marks and Spencer is in play for a promotion back to the big league, after scoring a succession of wins by upgrading its profit forecast and unveiling strong sales growth in the first 19 weeks of its financial year, with its turnaround strategy paying off. The focus of the M&S brand on both quality and price has been a clear advantage and its stock selection has received the thumbs up from shoppers. Shrinking its estate, and closing larger stores in town centres, is a strategy bearing fruit with smaller shops in retail parks offering easy to use click and collect services. A promotion back into the topflight would be a coup for chief executive Steve Machin and co-CEO Katie Bickerstaffe, the duo who are shaping up to be a dream team by reviving the company’s fortunes amid the challenging cost-of-living environment. But there are challenges ahead, with the longer-term outlook for retail hard to map.
Diploma was rewarded with high marks from investors following its recent results, showing it once again managed to churn out consistent sales growth, partly thanks to repeat orders, helped by a shot of revenues through acquisitions. The technical products supplier offers a combination of high returns, consistent growth and M&A activity which has added up to a potent business model pushing it into potential FTSE 100 territory.
Dechra Pharma looks set to briefly join the index but would drop out as soon as its takeover by Freya Bidco is complete. The company, which operates in 26 countries announced in June, it had agreed to be taken over in a £4.46 billion deal.
Hikma Pharmaceuticals appears to be a leading contender for promotion given its stronger performance over the summer. Early in August it lifted annual revenue and margin guidance for its generics drugs business as first-half core operating profit rose 35%. Competitive pressures are easing, and volumes are being increased across the portfolio, which also helped boost investor sentiment. With the generics business expected to report revenue growth of close to 30%, investors have cheered the outlook, sending the share price up further, although its edged down slightly in recent days.
Johnson Matthey has struggled to find a significant new profitable direction after the disappointing retreat from the battery manufacturing plans, which investors had pinned their hopes on as a successor to its catalytic converter business. With internal combustion engines set to be phased out, there will be far less demand for this technology. It’s also been hit by cost-of-living headwinds with inflationary pressures adding to costs, while demand for vehicles its tech is used for has fluctuated. This has depressed the share price, making it a prime contender for demotion. The firm is still attempting to find its place in the new world and its recycling business of platinum group metals will be part of this. However, with delays to the electric revolution foreseen, revenues from its clean air business will keep ticking over but won’t set the investment world alight.
Persimmon shares have been sliding amid fresh data indicating the extent to which the high cost of borrowing is weighing heavily on the housing market. Even though its reiterated full year guidance, investors have been swayed by other industry data, showing sales overall are deteriorating at a rapid click, which is not surprising given that potential home buyers are more anxious about taking on higher monthly payments, which could impact forward sales. Nevertheless, the housing shortages in populous parts of the UK don’t look like being solved any time soon, which should give housebuilders like Persimmon more resilience for the longer term.
Abrdn faces the prospect of being ditched from the topflight for the second time in a year, after its share price dropped my almost a third in less than a month. It reported fund outflows of £4.4 billion for the first half of 2023 amid challenging economic conditions. Certainly, sky-high inflation and worries about economic growth have been challenging for the asset management sector, and Abrdn’s weaker performance in this environment looks set to propel it out of the big league. The company has shrugged off the potential demotion, remaining confident in its strategy. It has been trying to keep revenue moving in the right direction through acquisitions. It now owns Interactive Investor, which should provide a relatively stable source of assets for the group given its one of the UK’s biggest direct-to-consumer investment platforms.
RS Group is a contender for demotion given its falling share price which is down by 26% over the last 6 months. Investors were unimpressed by the latest update which showed lower first quarter revenues than expected. The weakness in the electronics market is continuing, which has been difficult to navigate for the group. There has been particular volatility in the Asia Pacific region, but trading in Europe, the Middle East and Africa and the Americas also came in softer than expected. PMI data showing a slowdown in business activity in key markets indicates the more challenging business landscape RG Group is operating in.’
