What’s going on?
The FTSE 100 is undergoing its quarterly reshuffle this week, and the injection of a few big names could give Britain’s biggest index a new lease of life.
What does this mean?
The FTSE 100 comprises the UK’s biggest public companies by value, and its performance helps investors gauge the health of both corporate Britain and the wider economy. But since company fortunes can turn on a dime, the FTSE is regularly updated to reflect stocks whose total market values have risen and boot out those whose values have dropped.
Both supermarket chain Morrisons and aerospace component-maker Meggitt are expected to join the party, having seen their stocks shoot up after takeover news. Dechra Pharmaceuticals too: the veterinary drug company’s shares are up more than 50% this year – a true testament to the lockdown pup-splosion. They’ll be taking spots from broadcasting giant ITV and engineering group Weir – both of which underperformed the FTSE 100 by nearly 10% last quarter – along with Just Eat Takeaway.com. That’s not because of its value, mind you: the FTSE just ruled that the food delivery platform is Dutch rather than British.
Why should I care?
The bigger picture: So much for a “new economy”.
Tech firms already represent a much smaller proportion of the FTSE 100 than they do of the equivalent American and German indexes, and Just Eat Takeaway.com’s elimination will only make matters worse. But at least the FTSE isn’t short on healthcare: the sector is already the index’s biggest, and it’s set to get bigger when Dechra joins the squad.
For markets: Keep an eye on funds.
Billions of dollars are invested in funds that passively track the FTSE 100, which means those funds are forced to invest in any stock new to the index. That’s why some keen-eyed investors might’ve bought into certain high-performing UK companies ahead of this week’s rebalancing, hoping they’d profit once the passive funds buy up their stocks to reflect the updated index.