Trading opportunities emerge after Footsie reshuffle
The latest quarterly scramble to gain promotion to the UK's premier share index has run right to the wire, with Aberdeen Asset Management and Croda International ascending to the FTSE 100, but oil services group John Wood Group just failing to make it.
Wealth manager Hargreaves Lansdown stayed up, helped by a late surge of buying interest on Tuesday.
India's Essar Energy, which only ascended to the FTSE 100 in June 2010, has been relegated to the FTSE 250, along with former oil market darling Cairn Energy, whose disappointing oil-drilling programme in Greenland has seen it eclipsed by others in the sector.
The rise of Aberdeen
Aberdeen Asset Management has come a long way since it was mired in the split cap investment trust crisis a decade ago. The latest lift was provided by a recent recovery in financial markets, and a 40 per cent growth in assets under management.
The company's promotion was almost put in doubt last week, when Credit Suisse cut its stake in the fund manager from 19.9 per cent to 9.9 per cent, prompting a 5 per cent fall in the shares. The Swiss bank got 240p for the shares it placed, and it remains to be seen whether that will look a smart deal by the time the fund manager joins the index after the close on 16 March.
Aberdeen's success eclipses that of Hargreaves Lansdown, whose shares have wobbled recently despite a 28 per cent annual increase in profit in December's results. That may seem a little harsh. Still, the company has done better at getting more revenue out of existing customers than attracting new ones. It lives to stay in the FTSE 100 another day.
Where there's gel there's brass
Yorkshire-based speciality chemicals firm Croda is the first from the sector to make it into the FTSE 100 for many years. Growth in the higher-margin gels and creams that go into consumer products like shampoo and cosmetics have powered the growth, with annual pre-tax profits posted in February up by a quarter.
Essar Energy, controlled by billionaire brothers Shashi and Ravi Ruia, joined the FTSE 100 soon after its initial public offering in May 2010, but has seen its market value fall by 70 per cent since then. Its departure leaves Vedanta Resources as the only Indian-owned member of the premier index.
For Aberdeen-based John Wood, getting into the FTSE 100 may only be a matter of time. After an eventful year in 2011, in which it sold its well support business and acquired PSN, a hint of takeover interest has also added further spice to the shares. There is no sign that oil exploration is slackening off, and that should mean more work for the group in future.
Climbing into the FTSE 250 are three natural resource firms: West African gold producer Avocet Mining, Petra Diamonds and RusPetro. Petra operates eight diamond mines, seven in South Africa and one in Tanzania, while RusPetro produces oil from western Siberia.
They are all recent London listings, and join Neuberger Berman Global Floating Rate Income Fund, plus the two firms relegated from the FTSE 100, in the 250 index.
Four companies are relegated from the FTSE 250 index: Unite Group, JPMorgan Smaller Companies, Allied Gold Mining and Impax Environmental.
The Footsie changes work on market capitalisation, with any firm that drops below 111th position on the date of review dropping out of the FTSE 100, and any firm moving into the top 90 by value replacing it. Similar processes operate for the FTSE 250 and FTSE 350.
In all those indices, with their fixed number of stocks, there often needs to be a rebalancing addition or deletion from shares that are nearest to meeting the requirements. If a merger is announced between two existing members of the index, then the largest company in the reserve list will go back into the index.
Today's moves are based on Tuesday's closing prices but confirmed following a meeting by FTSE management today. Babcock International remains the largest company not to get in, as it was in December's reshuffle.
A review makes for trading opportunities
Speculation about promotions and demotions can have a major effect on the stocks concerned. Once a firm is promoted, a whole series of market trackers that benchmark to the respective indices automatically have to take a position in the company's shares, which can cause them to rise.
Typically, traders will buy on the news of promotions and get in ahead of the tracker funds that aren't allowed to buy ahead of the actual inclusion. Likewise, companies that are being relegated - many of them heavily short-sold anyway - tend to experience further selling ahead of their expulsion from tracker portfolios.
This was written for our sister website, Interactive Investor