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Your Money > Investing Comment Articles > Ups and downs
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By Richard hunter, Hargreaves Lansdown
Based on the closing prices as at 10 th June, the FTSE100 has undergone its own version of a relegation and promotion battle. Moving up to the FTSE100 from the FTSE250 are the London Stock Exchange, investment company 3i and plumbing and central heating concern Wolseley. Moving in the other direction are energy company Drax, Lloyds insurance underwriter Amlin and Costa Coffee and Premier Inns owner, Whitbread. Rather oddly, the three companies rejoining the premier index were each demoted in the last reshuffle in March. The FTSE100 quarterly review, in essence, aims to ensure that it is the largest capitalised of the UK listed companies which are represented in the index. Strictly speaking, it has been the “FTSE102” for some time, with both Royal Dutch Shell and Schroders carrying two listings. At some point these may reunite to remedy the apparent anomaly. Otherwise, since the number of companies in the index must remain the same, so there will be an equal number of promoted and relegated shares. Of course, market capitalisation is calculated by multiplying the number of shares in issue by the current market price and so (particularly in current conditions) there can be a very fluid change amongst the runners and riders on the edges of promotion and relegation. Not that the bigger players are immune – the market caps of the UK banks have been notoriously volatile over the last eighteen months of course. To the fringe companies, though, why is this important? Near the very top of the list is kudos – the fame and recognition that comes with being a true blue chip company. There is the ability to improve its own credit ratings – after all, it originally floated to raise capital for the business – as a household name it can continue to grow and make its brand more recognisable, which in turn could lead to further expansion opportunities. From an investment point of view, any FTSE100 tracker is going to require the newly promoted shares in its fund and so the announcement of promotion will inevitably be followed by some hefty buying of the shares and, most likely, a hike in the share price (the absolute reverse will be true in the case of relegation) – readers may wish to bear this in mind. The issue can be further clouded by speculative buying of the stocks ahead of the actual announcement of the changes being made. Each of the promoted stocks is regaining a previous spot within the FTSE100, typified by the likes of Wolseley. Whilst the shares still remain 47% down over the last year, the more recent news has been positive. The weakness of sterling has given a currency tailwind, the previously announced rights issue has stabilised their finances, and the possibility of a US economic recovery has pushed the share price up some 86% in the last three months alone. There were also concerns about the financial position of 3i in the early part of 2009, and the eventual announcement of a rights issue in early May boosted the price in much the same way that it had previously been hit. The shares have risen 123% over the last three months, although they are down 48% over the last year. In some cases, the dramatic share price changes which result in such stocks being promoted or relegated means that the general market view on the shares may change, on the basis that the share price is now “up with events”. As such, the consensus may seem at odds with the stock's new position. For example, of the recently promoted stocks, the London Stock Exchange is regarded as a hold and Wolseley a weak hold, whilst of the stocks going down Whitbread is flagged as a strong hold and Amlin a cautious buy. The changes will become effective from the start of trading on Monday 22 nd June. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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