Deck the halls with risers and fallers. ‘Tis the season for the quarterly UK Index review and everything points to Royal Mail ending up on Old Nick’s naughty list.

Next Tuesday is the cut-off date for determining who’s too small (by market capitalisation) to stay in the UK 100 (“blue-chips”), and who’s big enough on the (“mid-caps”) to take their place.

Any UK 100 company that has fallen down the rankings to #111 or worse gets the boot from the UK 100 , dropping into the and replaced by the highest ranking mid-cap. Any companies ranking #90 or better are automatically promoted to the UK 100 , replacing the lowest ranking blue-chip.

While it is rare for no changes to be made during a review, it does happen, last September’s being the first time since 2006 that nobody move up or down between the UK 100 and 250.

As things stand, Hiscox is on the cusp of UK 100 promotion (#90 by market cap at £4.83bn) thanks to a month-long share price uptrend after the Lloyds of London insurer reported Q3 gross written premiums +14% YoY. For it to miss out, next best candidate Spirax-Sarco (engineering firm worth £4.5bn) would need to close the 5-6% valuation difference by close-of-play Tuesday. The race is on!

UK Index Winter Reshuffle (29 Nov 18)

There is significantly less doubt within the relegation zone. Troubled postal service Royal Mail isn’t merely flirting with demotion, that letter already has a stamp on it. It currently ranks #118 (£3.25bn), its shares down almost 50% since May, battered most recently by an October profits warning.

Can Royal Mail muster enough strength to escape the relegation zone? As things stand, its shares would need to rally a significant 23% in 3 days, in order to leapfrog the next highest valued UK 100 companies (Just Eat, Rightmove).

One other scenario is that Royal Mail rallies 12% back into the “safe zone” above #111, while Hiscox falls 4% below #91. In which case, we get that rare no-change situation yet again. Unlikely, but you never know.

This isn’t the first time Royal Mail has flip-floped between London’s top-flight and mid-cap indices. After its October 2013 IPO, it joined UK 100 just 2 months later, displacing chemicals manufacturer Croda. In September 2017, it briefly left the index after a pensions dispute with labour unions led to a summer slide, but made a triumphant return in March 2018 (replacing real estate firm Hammerson), as the share price slowly recovered.

A mere 10 months later, however, and it look to be on its way out again, this time after a disappointing fall in home-market productivity that triggered the aforementioned profits warning. Given the labour-intensive nature of Royal Mail’s business, persistent union/pensions issues continue to haunt it.

All said and done, does it make a big deal for Royal Mail no longer being part of UK 100 for the second time? After all, it will merely become of the biggest mid-caps and could be promoted yet again in the quarters to follow. Setting aside the prestige of being part of the UK 100 , a demotion from the index will put Royal Mail out of reach for some portfolio managers, mutual funds and tracker funds whose benchmark is the UK 100 .

The second demotion in as many years, however, may be just a sign of a deeper malaise within the postal company. Maybe we should all send Royal Mail a get-well card and a consolation Christmas gift. Preferably not via one of its many fierce delivery competitors.

For continuous coverage of major UK Index components and attractive trading opportunities, click here to sign up for our award-winning daily research that you can receive directly in your inbox.

Artjom Hatsaturjants, Research Analyst, 29 Nov 2018