The latest quarterly review of the FTSE 100 constituents comes amid an evaporation of investor confidence as worries ratchet up about the impact of soaring inflation and rising interest rates on growth at a time when the global economy is still adjusting to changes brought about by the pandemic.
A change from lockdown behaviour with e-commerce sales falling and streaming services struggling is partly behind the arrival of Royal Mail and ITV in the FTSE 100 drop zone. Despite worries swirling about a potential levy on profits later this year, British Gas owner Centrica still looks set to climb back into the FTSE 100 after its fortunes were lifted due to higher energy prices.
With students flooding back into city centres and campuses, that’s lifted the prospects for university accommodation group UNITE, which could be pushed into the blue chip league. Fast fashion retailer ASOS is set to be re-styled as a FTSE 250 stock, following its entry onto the main market of the London Stock Exchange, while a search for steady income looks set to propel Supermarket Income REIT into the index. PureTech Health and Trustpilot appear to be among the casualties of the flight away from riskier assets and are contenders to leave the FTSE 250.
Centrica’s potential for FTSE 100 promotion
It’s been a volatile ride for Centrica (LON:CNA) over the past week amid rumours that the British Gas owner could be scooped up in the firms hit by the windfall tax. As yet that hasn’t materialised, which helped the shares recover some ground, but the Chancellor appears to have left the door open to potentially imposing a levy later this year. However, Centrica’s solid first quarter performance had already given the stock the boost it needed to be propelled high up in the promotion zone, so despite the recent volatility, it’s still clinging onto pole position to take a slot in the FTSE 100.
As well as higher revenues from its nuclear and gas production business, cost savings have also boosted profits and Centrica’s balance sheet is also looking a lot healthier thanks to disposals. There are still clouds hovering in the form of higher wholesale costs but Centrica’s hedge positions have proved to be a protective haven during recent surges in energy costs.
Already British Gas was the dominant provider of gas and electricity and it’s now also taken another 750,000 customers under its wing as other providers went bust. The current pricing structure limits what it can make on bills, but by gaining market share, alongside another increase in the energy price cap in the Autumn will put Centrica in a stronger position, even as uncertainty about a potential levy lingers.
UNITE Group is in position for FTSE 100 promotion
UNITE Group (LON:UTG) is the UK’s biggest owner and developer of purpose-built student accommodation and its prospects have been looking up over the past year as lockdowns became memories and real lessons replaced virtual classes. The past two years have been a rollercoaster ride for the group but it’s swung back into profit as students have returned and occupancy rates have recovered. The value of its vast property portfolio across 27 towns and cities in the UK has increased, and it still has its eyes set on growth, There could be potential ahead, as older student houses of multiple occupation face a deadline in the next few years of having to abide by stricter eco criteria, which could lead to more landlords selling up and an increase in demand for purpose built accommodation.
Royal Mail set to be posted down from the FTSE 100
Royal Mail (LON:RMG) made a rapid recovery in 2021 but its recent share price weakness could see it fall out of the FTSE 100 as it’s once again in the drop zone. Some investors appear to think Royal Mail’s pandemic performance has now come unstuck with parcel numbers on the decline, but although volumes have fallen from last year’s highs, they crucially appear to be rebasing at a much higher level than pre-pandemic. Royal Mail’s accelerated modernisation drive has also been boosting profitability and the move to greater automation should make the company more flexible to deal with peaks and troughs of demand going forward. However worries about inflation are weighing on the stock, with the company warning that stamp prices may have to rise again as it faces a raft of higher prices from energy to labour costs, but here again increased automation should help it weather the storm.
ITV at risk from changing channels
ITV (LON:ITV) is at risk of changing channels from the FTSE 100 big league to the FTSE 250 mid cap as worries rise about the risks in the streaming space. Competition is fierce in the sector, as the recent subscriber losses for Netflix have shown. 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. Although ITV’s Studios business offers growth potential given there is such a high demand for quality content, running a production company is an expensive business which is reliant on big hits so if the shows don’t land well, there could be a hit to the bottom line, given the Studios business makes up around a quarter of group profit. ITV’s acceleration of digitisation makes sense but there are plenty of headwinds facing the group which is why the share price has fallen back.
Harbour Energy is a contender to exit the FTSE 100
North sea oil and gas producer Harbour Energy (LON:HBR) looks set to head downstream from the FTSE 100 as worries about the windfall tax ricochet around the stock. Harbour Energy is the reincarnation of Premier Oil formed via a reverse takeover by newly listed Chrysaor. The new levy is set to sharply increase the company’s tax bill, and the share price has taken a hit as a result, dropping back to levels last seen in mid-March.
ASOS set to take to the FTSE 250 stage after being the star of the AIM index
Fast fashion retailer ASOS (LON:ASC) is set to be re-styled as a FTSE 250 stock, following its entry onto the main market of the London Stock Exchange. The last year has been a difficult ride for ASOS, originally shorthand for As Seen On Screen, but a spot on the FTSE 250 stage could help erase some of the volatility. It should push it further into the limelight in terms of profile among investors, given that it would see it included in fund purchases for index trackers which aim to mirror the performance of the index.
Although ASOS was perfectly placed to capitalise on the accelerated shift to online shopping during the pandemic, re-opening trends shook the stock, and it’s also been hit by a maelstrom of supply chain issues. Fresh waves of covid crashing on key markets have also been a scourge, delaying demand for occasion wear. It still has lofty ambitions for growth and plans to increase sales from £3.9 billion to £7 billion over the next three to four years, and more than triple profit margins. But it’ll have to deal with plenty of headwinds before that, not least the cost of living squeeze which is set to limit the amount its customers will be prepared to spend on fast fashion.
Other potential movers and shakers in the FTSE reshuffle
The F&C Investment Trust (LON:FCIT) is another contender for entry into the FTSE 100 after a stronger performance in May. The Trust aims to secure long-term growth in capital and income from an international diversified portfolio of listed equities, as well as unlisted securities and private equity with gearing.
Despite the volatility facing the financial markets, there is still strength in the appetite for renewable energy stocks, with Foresight Solar Fund (LON:FSFL) regaining shine amid a change in the direction of its diversified portfolio. It won shareholder approval to focus on battery storage alongside its ground based solar plants and there appears to be confidence in the strategy bearing fruit with shares climbing sharply since the start of the year, which could help propel it back into the FTSE 250.
Another contender to join it in the mid cap league is Supermarket Income REIT (LON:SUPR), a real estate investment trust. It appears to be a beneficiary of investors looking for potentially more stable income prospects amid the market volatility. The aim of the fund is to provide shareholders with an attractive level of income together with the potential for capital growth by investing in a diversified portfolio of supermarket real estate assets in the UK.
Biotech company PureTech Health (LON:PRTC) could be heading out of the FTSE 250, a casualty of investors’ increasingly cautious approach to risk. The nature of the product pipeline makes the results quite volatile, although the broad spectrum of its drugs could help offer longer term resilience.
Trustpilot (LON:TRST) has also fallen out of favour as investors ride back their bets on high growth companies in an era of rapid monetary tightening and it’s also a strong contender for demotion from the FTSE 250. Slowing revenue growth at the company sent shares reeling, and worries are mounting about how the evolving e-commerce ecosystem will affect its prospects. There is heightened competition in the sector, particularly from the big retail platforms like Amazon, which runs their own review systems.
Bingo and casino operator Rank Group (LON:RNK) is also set for demotion from the FTSE 250. The chips appear to be down for the company after it cut its full year guidance and warned of inflationary pressures hitting the business.’
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