Royal Mail likely to drop out of Footsie amid latest reshuffle

The impact of the cost of living crisis is predicted to see Royal Mail fall out of the FTSE100 this week, but soaring energy prices are set to herald a return for Scottish Gas owner Centrica.

The reduction in Covid-19 test kits being sent by post has dented Royal Mail's revenues.

Royal Mail and ITV are among the candidates in the drop zone ahead of the quarterly reshuffle due to be announced on Wednesday,

Shares in Royal Mail have been falling amid a slowdown in e-commerce sales and are now more than a third lower than they were at the start of the year.

Earlier this month analysts at Peel Hunt downgraded its rating on the group to a “sell” after warning that the squeeze on disposable incomes would likely cause a drop in non-essential purchases.

Reducing government spending on Covid-19 test kits, which had driven a significant proportion of the group’s revenues during the pandemic, have also see the broker cut its forecasts on Royal Mail.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the latest quarterly review for the blue-chip index “comes amid an evaporation of investor confidence as worries ratchet up about the impact of soaring inflation and rising interest rates”.

“A change from lockdown behaviour with e-commerce sales falling and streaming services struggling is partly behind the arrival of Royal Mail and ITV in the FTSE 100 drop zone,” she said.

“However, Centrica’s fortunes have lifted along with higher energy prices, as it’s managed to deftly navigate volatile costs.”

Earlier this month Centrica, which also owns the British Gas brand, flagged annual earnings at the top end of targets.

In a trading update, the group said it has been boosted by "strong" volumes across its nuclear and gas production operations.

Meanwhile, its trading business has also increased volumes of gas and renewable energy to improve UK supply amid pressure from the conflict in Ukraine.

Metals group Johnson Mathey is another promotion candidate, despite it warning last week that it expected its performance in the months ahead to come in at the lower half of forecasts as its customers were impacted by Covid lockdowns in China and the Ukraine war.

Annual pre-tax profits fell 13 per cent to £195m as it took a 17 per cent hit to operating profit from the sale of the batteries business. Revenue rose 4 per cent on the back of an increase in precious metal prices.

In the FTSE 250, continued appetite for responsible investing could see JLEN Environmental Assets Group and Foresight Solar Fund enter the table, but Streeter said the Baillie Gifford US Growth Trust and PureTech Health “appear to be among the casualties of the flight away from risky assets” in the index.

In the previous reshuffle, the impact of the Russia-Ukraine conflict saw steelmaker Evraz and gold miner Polymetal depart the FTSE100.

There were replaced by West African gold producer Endeavour Mining and kitchen supplier Howdens.

In the FTSE 250 another gold miner, Petropavlosk, left along with outsourcer Capita, Cineworld, and publisher Reach.

They were replaced by Clipper Logistics, Tullow Oil and the Urban Logistics REIT.