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MARKET COMMENT
By
Every three months, the FTSE Group announces changes to its various UK indices. The last FTSE reshuffle of 2002 is due to be announced later today. Cable & Wireless (LSE: CW.)(NYSE: CWP) is one of the companies expected to be ejected from the FTSE 100. The plunge in the company's share price in the last two days has taken its market value below £1b, which is too small to justify its continued inclusion in the UK's leading index. In the latest reshuffle qualification for entry into the FTSE 100 will be based on the closing share prices on 10 December. Any company that has risen to become one of the 90 largest UK companies in terms of market capitalisation automatically qualifies for inclusion. Any company currently within the FTSE 100 that falls below 110th place will drop out of the index. Of course the same number of companies have to go in and out so there can be some additional movements of companies in the 90-110 range to balance things out. Based on last night's closing prices, Cable & Wireless, Corus Group (LSE: CS.) and Brambles (LSE: BI.) will drop out of the FTSE 100. All these companies have endured a tough few months, delivering a string of profit warnings and negative announcements. British Airways (LSE: BAY)(NYSE: BAB) will return to the top flight, as will Whitbread (LSE: WTB). They will be joined by the retail property group Liberty International (LSE: LII). The definitive changes will be announced by FTSE later today and will take effect on Monday 23 December. It is worth bearing in mind that the various changes to the make up of the indices are designed to ensure that they remain an accurate reflection of market activity. They make very little difference to the actual business performance of the companies. You are no more likely to dine out at one of Whitbread's outlets or book a flight with BA after the 23rd of December. The only thing it really affects is the ego of company's CEOs as members of the FTSE 100 are perceived as the elite of UK plc. Some investors might be a little worried that the share price of a company might fall when it is no longer included in one of the major indices. Funds that track the FTSE 100 may have to sell their shares. Other fund managers that operate under strict guidelines as to what shares they can and can't have in their portfolios may have to adjust their holdings too. However, there is little evidence to support this theory as it's very difficult to separate out the effect of a company moving in or out of an index from all the other possible factors that could have an impact on its share price. In fact, the cost of dealing may well outweigh any benefits from trying to pre-empt a share price movement before the changes take place. So the best advice is not to even try. Instead spend some time reading through the free annual report and then decide whether you believe the shares in the company are undervalued or overvalued. The author owns shares in British Airways.