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Tue close: utilities, housebuilders gain from reshuffle

Talks to resolve the crisis in Greece once again hung over trading desks and the FTSE100 closed 25 points down at 6928.27.

Attention was also focused on this quarter’s FTSE All Share reshuffle which is likely to reflect the impact of the surprise General Election result in May, said David Jones, manager of the Aberdeen UK Tracker Trust.

He said house builders are firmly in the ascendancy, and utilities and government outsourcing groups are also getting a reprieve.

“Equally, many of the new IPOs continue to go from strength to strength on the back of improving consumer spending trends. However, even the recent recovery in the oil price is unlikely to save companies from the beleaguered commodities sector, a number of which are faced with demotion.”

The reshuffle of the index will be announced at the close tomorrow, with the changes becoming effective at the close on 19 June.

“Following Tullow Oil’s relegation from the FTSE 100 last quarter, Aggreko is now edging towards demotion to the FTSE 250. Specialist engineering group Meggitt may also join the relegation list. Among the FTSE 250 constituents, RPS Group, De La Rue, BlackRock World Mining Trust and Infinis Energy also look vulnerable to demotion to the FTSE Smallcap index,” said Mr Jones.

“The weakness in these industries has created a space for others to flourish:  The house builders, for example, had been weak prior to the election on the prospect of greater regulation and potential weakness in the housing market. They have surged since the Conservatives were returned to power. Berkeley is up over 20% from its April lows and will retain its position on the reserve list for entry into the FTSE 100. Its promotion would leave four house builders in the FTSE 100, after Barratt Developments and Taylor Wimpey joined the index in December.

“Central London developer Derwent London may also be a beneficiary from the index changes with a possible promotion to the FTSE 100 in this set of changes or the next. It is set to be a key beneficiary of the Crossrail project with 70% of its portfolio within 800 metres of a Crossrail station, focused around Tottenham Court Road and Farringdon.

“Further down the capitalisation scale, Foxtons has been promoted to the FTSE 250 index following the acquisition of FTSE 250 constituent BRIT, after a volatile period. Its share price has suffered on the back of an apparent softness in the London housing market and nervousness over the outcome of the General Election. Nevertheless, it jumped over 40% on the general election result and has stayed high.

“It is also likely to be good news for more niche property groups. Despite fears over high valuations, infrastructure remains popular with investors for its stability and high income. After a strong run since its IPO, John Laing is a key candidate for promotion to the FTSE 250.

“A key long-term trend in the All-Share has been the relative weakness of financial stocks, notably the banks. It is perhaps unsurprising, therefore, that one of the top candidate for promotion to the FTSE 100 in this reshuffle is a group that has built its business on disintermediating the banks: Provident Financial picks up where the high street banks leave off, lending to people and small businesses no longer considered viable lending prospects by the banks. Its share price is up 44% in a year and it looks well set to join the major index. Global communications group Inmarsat is the leading contender for promotion to the FTSE100 index.

“We believe that a key long term trend shown by the latest round of rebalancing is the strength of the new issue market. This round will potentially see six new issue companies join the midcap FTSE 250 index – from Auto Trader to Whizz Air. The new issue market has been buoyant since prior to the last annual rebalancing, particularly in the midcap arena. FTSE Smallcap constituent Onesavings Bank also looks a likely candidate for promotion to the FTSE 250 index

“One of the groups vulnerable to go from the FTSE 100 in this reshuffle is Sports Direct, despite an increasingly buoyant consumer environment. Morrisons is also in this camp.

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