FTSE 100 relegation: What to do when a stock you hold is booted from the index
13:00, 3 June 2022
FTSE 100 relegation is bad news for a company, but is it the end of the world for the stock? Not necessarily.
There are no guarantees that companies will remain in the FTSE 100 (UK100) or FTSE 250. The indexes are reviewed quarterly and stocks can be promoted or demoted, based on market capitalization.
If a stock you hold is relegated from the FTSE 100 or FTSE 250, it is certainly a sign that it is struggling. But should you panic and sell, or is the stock still worth keeping in the event it makes it back to the prestigious indexes?
What is your sentiment on UK100?
FTSE 100 (UK100) price chart
How does a FTSE reshuffle work?
The major FTSE indices are reviewed quarterly by index compiler FTSE Russell, which is part of the London Stock Exchange Group. During this review and reshuffle, companies can be promoted or demoted into or out of the index. Under the admission rules, companies join or get booted off based on their market capitalisation.
Russ Mould, AJ Bell investment director, explained to Capital.com: “The constituent lists of the major indices are set according to share prices from the close of business on the Tuesday before the first Friday of the review – so in this latest case according to market valuations on Tuesday 31 May. The changes after the close on Wednesday 1 June and come into effect as of the market opening on Monday 20 June.
“In general, a stock will be promoted into the FTSE100 at the quarterly review if it rises to 90th position, or above (by market capitalisation) and a stock will be demoted if it falls to 111th (by market value), providing it fulfils the other criteria, such as free float and a presence on the Main Market.”
FTSE reshuffle losers and winners
The last FTSE reshuffle took place at the end of May and saw a few companies demoted from the index, including ITV and Royal Mail. According to a report by The Guardian, shares in ITV have dropped by a third this year and fell further when it announced plans for a new streaming service to compete with established players such as Netflix, Amazon, and Disney+.
Some analysts are sceptical over this plan as companies like Netflix are already struggling to maintain their subscriber base as consumers tighten their belts amid rising prices of fuel, food and energy.
In a research note, Susannah Streeter, senior investment and markets analyst at Hargreaves Landsdown, pointed out: “There are concerns that consumers will be less willing to shell out for the upcoming ITVX venture particularly given the cost-of-living crisis, and worries have risen about advertising revenue as a recession looms.”
ITV (ITV) share price
Royal Mail (RMG) has also been affected by rising costs and a decline in demand for its services as Covid-19 restrictions have been eased.
The postal delivery business saw its pre-tax profits fall 8.8% in the last financial year and its revenue was down 1.6% year on year.
Royal Mail (RMG) share price
Companies that were promoted in the last reshuffle include British Gas and Scottish Gas owner Centrica (CNA) and student property firm Unite (UTG). Centrica’s shares have risen more than 10% this year as energy prices increased fuelled, in part, by the conflict in Ukraine. The company lost its blue chip status back in June 2020.
Meanwhile Unite, which specialises in owning and operating purpose-built student accommodation, has done well recently as things have opened up again following easing of pandemic related restrictions and students have returned to universities in need of accommodation.
Centrica (CNAI) share price
Should you sell if a company is demoted from the FTSE?
The demotion of a company from the FTSE can garner negative press and be a worry for investors. But this doesn’t mean it’s the end of the world for the business.
“When a FTSE 100 or 250 firm is demoted, the public notices it. That could trigger fear among stockholders and unwise decisions. Overall, relegation from the FTSE 100 doesn't guarantee a company's outlook is bleak. The corporation may be going through a rough patch and could be elevated in the next reshuffle,” says Johnathan Merry, founder at Moneytransfers.com.
If a company you hold gets relegated, it’s important to keep calm and do some research into why it was demoted. The reasons may be insignificant in the long term and the company could soon make its way back into the index once it rectifies the problems that contributed to its relegation.
There may even be an opportunity to prospect from companies that been dropped. But this can be tricky to do particularly as problems that warrant delegation may have already been factored into the share price and remember, you won’t be the only one trying to make such speculative bets.
Mould reminds traders to be mindful of why they invested in a company in the first place. He adds: If you own a share in a company, you are effectively buying a share in its competitive position within its industry, and why it generates revenues from customers. This could be down to quality of service, or brand, or technology or some other advantage.
“None of those are in any way affected by whether the stock is included in an index or not, and neither are other key elements of a potential investment case for company, such as management acumen or financial strength.”
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