FTSE drifts lower as fears over UK’s economic outlook leads to caution

BRITAIN’S top share index wilted yesterday after economic data painted a bleak picture of prospects for a rebound in activity in the United States, Europe and China, heightening concerns over company earnings and valuations.

The UK’s FTSE 100 closed down 33.84 points, or 0.6 per cent, to 5,854.64, continuing to edge away from 6-month highs reached after the U.S. joined Europe in taking action to stimulate the global economy.

A worsening in the Eurozone business climate and a contraction in China’s HSBC Manufacturing PMI for the eleventh month in a row, showed what a tough job central banks face to try to boost growth by splashing their cash.

“With the Q3 earnings season looming and concerns building over just how these numbers will appear, the major worry is that even with the (central bank action), equities will now find themselves struggling unless we see a step change in the health of the global economy,” Fawad Razaqzada, market strategist at GFT Markets, said.

UBS analysts have halved their bottom-up forecasts for global earnings growth this year over the past three months, to just 5.4 per cent, although the pace and magnitude of the downgrades is starting to moderate.

Market gains following the stimulus measures, have seen sectors such as banks and the miners valuations re-rate on a price-to-earnings basis to post credit crisis highs. But continued low volumes in equity trading suggests a lack of confidence among investors.

Miners took most points off Britain’s leading share index, falling 2.4 per cent, in tandem with metal prices, after the weak data, in particular from resource hungry China, heaped pressure on the sector’s earnings outlook.

The mining sector has lagged the broader market in 2012, shedding 1.2 per cent in the year-to-date, compared with a 5.7 per cent gain on the FTSE 100 partly in response to rising input costs and weakening demand for raw materials.

Anglo American and Rio Tinto shed 4.4 per cent and 2.7 per cent respectively as Liberum cut its respective ratings on the firms to reflect caution on their earnings outlook.

Liberum cut Anglo American to “hold” and Rio Tinto to “sell” on valuation grounds.

The market implied five-year earnings per share compound annual growth rate for miners in developed Europe is -6.2 per cent, compared with global equities on 0.7 per cent.

With the UK benchmark up more than 10 per cent since June, investors need a new impetus to push the market beyond the six-month highs hit last week and towards the psychologically important 6,000 level.

That could potentially come from China, if the data is weak enough to galvanise the authorities there into fresh stimulus measures.

But in the meantime miners were not the only commodity-related stocks to take a knock as energy shares tracked oil prices, which have dropped sharply.

Weak oil prices will eat into the earnings of the likes of Royal Dutch Shell, down 1.9 per cent. But oil price fall will give a boost to oil consumers such as airlines. International Airlines was a big gainer, up 2.3 per cent.

Elsewhere on the upside, investors breathed a sigh of relief after Imperial Tobacco’s reassuring end-year trading update. Imperial Tobacco added 2.7 per cent, rallying after falls in the previous session.