The changing face of the UK stock market

In what could be one of the biggest shake-ups of the FTSE 100 in the past decade, Easyjet, Carnival, Meggitt and Centrica (the owner of British Gas), could drop out of the UK’s main stock market index later this month.

The reshuffle takes place on 22 June but is based on the closing price of shares on 2 June. A firm will typically drop out of the index if it is no longer one of the 110 most valuable companies on the stock exchange.

Based on those closing prices earlier this week, a number of companies hit badly by the Coronavirus could exit the index. Budget airline Easyjet, defence firm Meggitt and cruise operator Carnival are all companies from sectors that have taken a beating in recent months.

Carnival and EasyJet have had zero revenue for weeks, as all but essential travel has been banned. Previously a holding in ES R&M UK Recovery fund, manager Hugh Sergeant told us he sold Carnival in March due to the negative outlook. Meggitt, which manufactures components for fighter jets has also suffered from the freeze on aviation.

Companies making it into the top 100

The relegated companies will be replaced by firms that have been beneficiaries of our working from home/quarantined lifestyles.

Cyber security firm Avast, Ladbrokes parent GVC, B&Q owner Kingfisher and the emergency repairs firm Homeserve are all tipped to rise into the list of the UK’s largest companies.

Homeserve is a top ten holding in AXA Framlington UK Mid Cap*. While this fund invests mainly in FTSE 250 companies, its manager will be pragmatic about including select opportunities from the smaller companies space, as well as letting winning mid-cap holdings like Homeserve grow into larger-sized companies.

Avast is a top ten holding in Montanaro UK Income fund*, while GVC Holdings can be found in both Merian UK Alpha* and ASI UK Income Unconstrained Equity*.

Kingfisher, a top ten holding in Jupiter UK Special Situations*, actually dropped out of the FTSE 100 in March, but with little else to do other than DIY in the past three months, consumers have returned to the store and its fortunes have picked up.

The US stock market could also change shape

Once dominated by oil & gas companies and banks, the FTSE 100 now has personal & household goods and healthcare companies as its two largest sectors, representing more than 13% each**.

In contrast, the S%P 500, which represents the largest 500 companies in the US, has technology (26.2%) and healthcare (15.2%) at the top***.

It is thought that the make-up of this stock market could also be transformed by COVID-19. The quarterly rebalancing of the index in March was cancelled due to the extreme volatility, so the next raft of changes will also be this month.

Nicholas Colas, co-founder of DataTrek research believes that more than 30 companies may have to be replaced this year as a result of the pandemic.

Tweaks to this index are also made on a rolling-basis and this month has seen DexCom (a company that focuses on the design, development, and commercialization of continuous glucose monitoring systems) Domino’s Pizza Inc and West Pharmaceuticals Services all enter the top 500, replacing Allergan and Helmerich & Payne, the oil & gas well drilling company.

Interestingly, one of the rules of index inclusion, is that a business must post profits for four straight quarters. This means that disruptive companies like Tesla, a top ten holding in Baillie Gifford Global Discovery*, are not included.

The types of companies that can generate a four-quarter profit streak coming out of the pandemic may also be very different to those that could do it before COVID-19 struck.

US equity funds that can invest in any sized company

Lazard US Equity Concentrated

This extremely concentrated US fund typically holds no more than 20 to 25 companies, ranging in size from the fairly small all the way through to the very large. Its managers
can also avoid entire sectors, which means the fund will look very different to the overall market.

JPM US Equity Income

Despite the naturally lower yielding nature of the US market, it has a long history of dividend payments and could be one of the more secure dividend-paying markets amongst a swathe of global dividend cuts. This fund taps into those companies, most of which are mega, large and medium in size.

AXA Framlington American Growth

Around a third of this fund is typically invested in tech stocks and it tends to have a considerable weighting in medium-sized companies (currently almost 20%*). The manager looks for companies that can innovate and have unique brands and intellectual property -traits that can give firms a competitive advantage and help them grow into market leaders.

*Source: Fund fact sheets, 30 April 2020
**Source: FTSE 100 fact sheet 29 May 2020
***Source: S&P, 29 May 2020