A lot has happened to markets since the last FTSE 100 review at the end of March, with high inflation and rising interest rates creating an unpredictable environment for many UK companies.
The rapidly increasing price of gas and oil is anticipated to boost the likes of British Gas owner Centrica onto the FTSE 100 this week, but concerns remain for oil producers after the government’s announcement of a windfall tax on those making excessive profits.
Likewise, experts are forecasting that Royal Mail and ITV, which benefited from a surge in demand over the past two years during the Covid lockdowns, will leave the index now that the pandemic has largely passed.
Here, Trustnet dives into the companies expected to join and leave the FTSE 100 ahead of Wednesday’s reshuffle.
Potential entrants
British Gas owner, Centrica, is expected to join the FTSE 100 after high commodity costs drove up its share price 40.3% over the past 12 months.
The cost of oil and gas has been rising at a rapid rate due to lingering inflation from Covid and the sanction of imports from Russia in response to its war with Ukraine. In the UK, this has coupled with the removal of the energy price cap, which has created a favourable environment for suppliers.
On top of this, the company continues to grow, taking in another 750,000 customers from competitors that went under, bolstering its position as a leading UK provider, according to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
Share price of Centrica over the past year
Source: Google Finance
However, the windfall tax, which was designed to raise money from those companies benefiting most from the rising commodity prices and distribute it to the poorest in society, could put a dampener on the thriving performance reported in the first part of the year.
The firm that owns British Gas has not yet been named as one of the companies affected by the windfall tax, but it could be scooped into the group of relevant firms in the future.
Although this would likely limit the firm’s profit, Streeter said that the company would probably be strong enough to withstand the levy.
Streeter said: “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.”
Also on the cards to join the FTSE 100 is UNITE, a property developer that runs student accommodation in 27 towns and cities across the UK.
With many students attending their lectures virtually throughout the pandemic, UNITE struggled with lower occupancy rates.
This seems to have picked up again now as universities bring back in-person seminars and future prospects look promising, according to Streeter.
She said: “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.”
Streeter also added that many existing student houses will soon be too old to pass stricter eco checks, creating demand for newer and more efficient blocks.
UNITE’s share price wavered over the past 12 months but ended the one year period with a 1.6% increase.
Share price of UNITE over the past year
Source: Google Finance
Potential exits
The number of parcels delivered by Royal Mail has been in decline since the highs of last year as Covid restrictions have been lifted.
Business boomed throughout the pandemic as people stuck in isolation ordered products online to beat the lockdown boredom, with Royal Mail’s share price leaping 155.3% between the start of 2020 and end of 2021.
However, its share price declined 45% in the past 12 months as consumers scaled back their online spending in favour of going out to high streets.
Share Price of Royal Mail over the past year
Source: Google Finance
E-commerce in general has taken a hit this year a demand evens out from the extreme highs reported in the pandemic, but Streeter said that the upgrades made to Royal Mail’s production line last year have boosted profitability.
Millions were invested into modernising and automating their processing line in order to keep up with heightened demand, which could be a big advantage moving forward.
Streeter said: “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 is also expected to drop from the FTSE 100 in this quarter’s reshuffle as companies across the streaming sector suffer a declining viewership.
Like Royal Mail, the channel performed well throughout the pandemic as more people viewed its content with little else to do, but subscribers have since lessened their screen time, while the introduction of myriad competitors has also impacted the firm.
ITV’s shares have dropped 42.6% over the past year and the company has a difficult journey ahead as it prepares to launch its new streaming service, ITVX, in an already crowded industry.
Share price of ITV over the past year
Source: Google Finance
Even though accelerating the group’s digital presence “makes sense” in the long-run as viewers move from traditional television to streaming services, the transition will be a challenge, according to Streeter.
She said: “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 the group’s profit.”