Less Isn’t Always More: Morrisons set to fall out of FTSE 100

March 24, 2021


3 min read

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What's going on here?

Morrisons is likely to drop out of the FTSE 100 for the first time in five years. The fall of the supermarket chain is a result of the predicted end to a grocery spending spree.

What does this mean?

There is a consensus among analysts that the grocery spending splurge caused by the pandemic will falter as the world returns to normal. As lockdowns end, there will be fewer reasons for people to stock up on pasta or bottles of wine. The predicted decline in grocery spending will likely dent Morrisons’ profits – and by extension, its share price and net worth. The FTSE 100 is London’s leading share index; it tracks the share prices of the capital’s most valuable public companies. The quarterly reshuffle of these “blue-chip” stocks looks set to be Morrisons’ relegation date to the less prestigious FTSE 250. Another relegation candidate is Pennon Group (the owner of South West Water). Morrisons and Pennon are expected to be replaced by two engineering companies – Weir Group and Renishaw.

What's the big picture effect?

Membership of the FTSE 100 brings reputational gloss. It informs investors that a company is well-run and usually profitable – this gives them the confidence to invest in a company’s stock, driving its share price higher. A higher share price makes it easier for a company to raise capital. Either through issuing shares or securing loans (banks are more willing to lend to companies with higher share prices). A higher share price is also a significant advantage – it allows a company to fund acquisitions using a mix of its share price and cash. A recent example is Salesforce’s purchase of Slack for $27.7bn (see our article on that here). Promotion or demotion from the FTSE 100 can prompt significant turnover in shares as investors who follow indices are obliged to adjust their portfolios. When Tesla broke into the S&P 500 (America’s most prestigious index) in 2020, investors tracking the index had to buy the electric carmaker’s shares – driving its share price higher. Morrisons’ impending exclusion from the FTSE 100 could, therefore, see its share price plummet.

The supermarket chain’s exclusion would highlight the shift in investor sentiment as the light at the end of the pandemic-related tunnel grows brighter. Supermarkets have thrived over the last year as they have been allowed to remain open during lockdowns. Consumer habits have evolved from restaurants to home dining and intermittent hoarding. The UK’s top supermarket chains have been so successful that they have returned £1.9bn in business rates relief (see our article on that here). However, Morrisons’ fall from the FTSE 100 would signal a shift towards industries expected to excel as the global economy reopens. Weir Group (the company most likely to replace Morrisons) has gained momentum in recent weeks thanks to booming metal prices. JPMorgan and Goldman Sachs both predict the start of a years-long commodities “supercycle”. A supercycle is an extending period of strong demand. Governments are preparing to use a green industrial revolution to kickstart growth post-pandemic. An illustration of the move to commodities is the recent surge in the prices of copper and silver; market expectations indicate there is more room to rise. 

As the vaccine rollout intensifies, there will likely be a shift in market demand away from those industries that have excelled during the pandemic (think groceries, tech, and healthcare). Businesses in cyclical industries (think banks and energy) look the most likely beneficiaries of this shift. But the biggest winner of all could be commodities as “going green” gains traction. In a year, the composition of the FTSE 100 could be even more different.

Report written by Deniyi Coker

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