FTSE-100 Reshuffling Reflects Business Impact Of Covid-19 Pandemic

Britain’s prestigious FTSE 100 index is poised to enact a major reshuffling of its components as certain companies hurt by the covid-19 pandemic will be removed from the benchmark.

The index comprises 100 companies listed on the London Stock Exchange with the highest market capitalizations. But The coronavirus crisis has decimated the market value of certain companies in the index, thereby mandating their removal.

Budget airline EasyJet and cruise line operator Carnival (which also trades in the U.S. under the symbol CCL) have endured 45% and 67% plunges in their share prices year to date. They have thus been relegated to the FTSE-250 index in a quarterly review by the global index provider FTSE Russell.

The cruise line and aviation industries have been shattered by the pandemic. EasyJet recently laid off one-third of its workers and warned that demand will not recover until 2023.

British Gas owner Centrica and engineering firm Meggitt have also been dropped into the FTSE 250.

The four available spots on the FTSE-100 index will likely be occupied by technology groups Avast and Homeserve, gaming group GVC and medical equipment maker ConvaTec.

.The changes will become effect at the start of trading on June 22.

“This FTSE reshuffle is highly reflective of the current crisis environment,” said Helal Miah, an analyst at investment broker The Share Centre. “Out go stocks from sectors that have taken a beating and questions arise as to how and whether some of these can manage this crisis.”

Russ Mould, investment director at stockbroker AJ Bell, mentioned some other companies that could join the index should their share prices jump: multinational retailer Kingfisher; Foreign & Colonial Investment Trust; B&M European Value Retail and insurer Direct Line.

Mould said a total of eight changes to the index were likely “but that number could go higher.”

Mould speculated about the possible return of some of the relegated stocks.

“EasyJet would need a big rally, but it could come back in September [during the next scheduled reshuffle],” he said. “With airlines, anything is possible.”

But Adrian Lowcock, head of personal investing at U.K. investment platform Willis Owen, warned that companies like EasyJet and Carnival may take a long time to return to the blue-chip FTSE-100 index.

“The reshuffle is one of the most far-reaching in the index’s history and will impact many tracker funds,” Lowcock said. “The crisis looks to have accelerated the shift to digital solutions for consumers. Whilst some of today’s reshuffle may be reversed in due course, the disruption caused to businesses has really highlighted the need for companies to have both robust demand and strong business models.”

Lowcock also noted that EasyJet and Carnival "have been in the eye of the storm" of the pandemic so their removal from the index was to be expected.

Philip Lawlor, managing director of global markets research at FTSE Russell, told CNBC that the changes reflect recent market data analytics not analyst forecasts nor any subjective criteria.

However, investors in index funds that track the FTSE-100 may suffer losses if the reopening of the economy benefits stocks that have been relegated to the FTSE-250 – thereby benefitting holders of indexes that track the “250.”

“If things were to subsequently improve and they were to come and bounce back, then yes, the pain trade for some of the passives in the FTSE 100 clearly would be manifest, but this is just the circumstances of when you have any index, you have companies that move up into the top quintile and those that drop into the bottom quintile,” Lawlor said. “That is just the Darwinian process of indices.”

The imminent reshuffling will be one of the biggest turnovers the index has ever seen.

“The world has changed since the last FTSE review at the beginning of March,” said Nicholas Hyett, an equity analyst at investment group Hargreaves Lansdown. “The U.K. stock market was some 13.5% higher back then and Royal Dutch Shell (RDS-A) topped the list of the U.K.’s largest companies rather than AstraZeneca (AZN). With all the upheaval there looks set to be more movers than usual in this quarter’s reshuffle.”

Hyett added that global travel restrictions meant that “revenues have sunk to practically zero” for EasyJet and Carnival, but “because cruise liners and planes are expensive and often funded by large quantities of debt, costs remain stubbornly high”.

Jasper Jolly wrote in the Guardian that the reshuffle reflects the direct disruptions from the lockdown.

Meggitt, one of the companies to be dropped from the FTSE-100, makes wheels and brakes for fighter jets – but it has been badly hurt by the freeze in the commercial aviation parts business.

“The contenders in line for promotion are also telling in our work-from-home, quarantine times: cybersecurity company Avast, emergency plumbers and electricians Homeserve, and medical equipment supplier Convatec,” Jolly wrote. “Kingfisher could also come up trumps, depending on share-price moves. People stuck at home have often had nothing better to do than [do-it-yourself], while its status as an ‘essential’ retailer meant sales were not too badly hit.”

Adam Vettese, an analyst at multi-asset investment platform eToro, said: "Coronavirus has been without a doubt the most dramatic thing to hit markets in living memory. Companies that had been performing saw their revenues disappear overnight, which caused widespread panic among investors and demolished share prices.”

Vettese added: "There has been a lot of talk about the FTSE 100's recent recovery but it is way too soon to call an end to all of this yet. Many companies face a long, hard road to recovery, as this latest FTSE reshuffle shows. But while times are tough for firms, it is arguably a great time to be an investor, with the current crisis throwing up a number of opportunities to buy into world-class firms at knockdown prices."