Thursday 4 June 2020 12:25 pm Apater Capital Talk

FTSE 100 quarterly review highlights the economy’s winners and losers

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City A.M. contributor

Home-repairs company Homeserve, cybersecurity firm Avast, DIY group Kingfisher and gambling giant GVC were the four companies announced yesterday as being promoted to the FTSE 100 – the index of the 100 biggest UK companies.
Cruise giant Carnival, airline easyJet, aerospace components firm Meggitt and British Gas-owner Centrica are all making way.

The FTSE reshuffles its pack every quarter and yesterday’s review is the first since coronavirus caused the country’s lockdown on 23 March. Avast, for example, has benefited from the increase in working from home. GVC, which owns Ladbrokes and Bwin, has seen a rise in online casino business. International travel has been among the industries hardest hit by coronavirus, which largely explains the departures.  

Promotion and regulation every three months

The quarterly review of the FTSE 100’s membership sees the best-performing FTSE 250 businesses promoted and the worst-performing top-tier companies fall through the trapdoor.

The process is rather like football’s Premier League and Championship deciding promotion and relegation four times a year, instead of once. In this latest review, Kingfisher (which owns DIY chains Screwfix and B&Q) is a rapid re-entry, while easyJet had only recently piloted a course back into the top division. It seems that some companies are rather like the West Bromwich Albion of Corporate Britain, bouncing between the top flight and the second tier (the FTSE 100 has been home to 19 continuous members since its creation 36 years ago).

It’s not a clinical cut: to prevent stocks from constantly dipping in and out, a company is relegated only if it sits in 111th place or below. Promotion is given to FTSE 250 companies that rise to 90th position or above. Also, the ins-and-outs are actually only implemented after a pause of more than a fortnight (for yesterday’s announcement, this means the changes actually take effect from 22 June). This allows investment managers time to adjust passive portfolios and other investments.

More broadly, investors are assessing how well companies are positioned to bounce back as coronavirus begins to recede (and their potential ability to succeed in the new world beyond). This was reflected in headlines earlier this week and has largely been the focus since lockdown began (the overall market briefly dipped below 5,000 points in March).

Just yesterday City AM reported that the FTSE 100 rose 1.5 per cent to 6,310 points, close to a three-month high – ironically, easyJet shares actually rose six per cent yesterday (perhaps the equivalent, in football, would be winning on the season’s final day with relegation already sadly inevitable).

Companies’ UK focus increases below top tier 

The FTSE 100 is naturally the headline-grabbing share index, but further indices – which include the FTSE 350, the FTSE All-Share and the FTSE4Good Global Index, which focuses on corporate responsibility, as well as the Alternative Investment Market (AIM) – also reflect the health of the overall economy.

More than 70 per cent of the FTSE 100’s revenues come from beyond UK shores and the ‘next 250’ are frequently more domestically-oriented than those on the FTSE 100.
“The FTSE 250 is, in some ways, a better indicator of overall UK economic performance and consumer confidence than the FTSE 100 because, proportionately, a greater share of its revenue derives from the UK,” says Simon Nayyar, who runs corporate and financial communications agency Acuitas Communications.

Kate Heseltine is head of policy and communications at the Investor Relations Society, which promotes best practice in investor relations for its members across the FTSE and AIM. “Many smaller companies aspire to be promoted into the ‘blue-chip’ league, which is often seen as a bellwether for the health of the UK economy,” she says.
But although the top 100 firms lead the way in terms of market value, Heseltine also highlights the significance of the other indices: “Although FTSE 100 constituents tend to have greater access to capital and can be influential in the development of new policies and regulation, we also see many examples across our membership base of companies outside of the FTSE 100 leading the way in investor communications and on high-agenda items such as environmental, social and governance (ESG) issues.”

FTSE 100 membership means marketing cachet

Naturally, however, scrutiny and attention is highest on fortunes of Britain’s corporate premier league: the FTSE 100.

“FTSE 100 membership screams ‘I’ve made it’ more powerfully than almost anything else can,” says Nayyar. “It grants access to a wider base of top tier institutional investors and greater liquidity. In marketing and business development terms, membership broadens and deepens networks worldwide while building the company’s equity story, and accelerating growth and enterprise value. That’s why there’s as much comment about quarterly relegations from the FTSE 100 as about those debuting.”

The FTSE 100’s next set of ins and outs will be revealed in September, with the headlines again likely to be dominated by the corporate winners and losers in the new coronavirus economy.