Britain’s FTSE 100 was heading for its biggest monthly loss since June last year, after investors endured a double-whammy of a second reduction in US stimulus and relentless pressure on emerging markets.
Following last year’s 14% rally on Britain’s blue chip index – and even stronger performances in the US, Japan and Europe – stock valuations are stretched and companies have been heavily sold-off if their earnings updates fail to meet expectations.
The FTSE 100 has subsequently fallen over 3% so far this year. This morning the index slumped 0.5% to 6,507 as European markets failed to match Wall Street’s overnight gains. Many Asian markets are closed for the Lunar New Year.
Fears over emerging markets have not gone away.
Some market watchers noted the US Federal Reserve’s lack of concern over the crisis enveloping emerging markets on making its $10 billion cut to its monthly bond-buying programme, but Capital Economics’ Julian Jessop had a different take: ‘To have deviated from this path [of reducing QE] may actually have increased uncertainty, not least by encouraging speculation that US officials are becoming seriously worried about the fall-out from the turmoil in emerging markets,’ he said.
The biggest fallers among London blue chips so far in 2014 have included shares with the greatest exposure to emerging markets, notably Aberdeen Asset Management (ADN.L) which has fallen 20%.
Companies making consumer goods for emerging market customers have also been under pressure. Brewers SABMiller (SAB.L) was among the biggest losers on Friday morning after a downgrade from Societe Generale from 'buy' to 'hold'. The bank's analysts warned about the outlook for European consumer companies: 'We expect recent emerging market currency weakness to herald a downturn in consumer demand, with a more prolonged period of poor growth in these regions than we had anticipated.'
SABMiller fell 2.2% to £26.91. Rival Diageo added to Thursday's losses, sparked after the drinks firm missed City estimates with first half sales growth of 1.8%. On Friday Diageo fell 1.6% to £17.91
BT (BT.L) was the top riser among the UK’s biggest 100 stocks, up 3.1% to 382p after reporting pre-tax profits of £617 million for the last three months of 2013. The company benefited from demand for its broadband and BT Sport service.
Nomura was particularly upbeat on BT shares: 'We expect BT’s growth to take another step forward when more relaxed price controls take effect from April, and again when it relaunches into enterprise and consumer mobile later in the year,' commented analyst James Britton. 'We are encouraging investors to buy BT ahead of it moving towards a growth rating.'
Defence and aerospace company BAE Systems (BAES.L) was down 1.6% at 428p after Barclays downgraded the company to ‘underweight’.
Barclays’ analysts said of the company: ‘We do not see a compelling organic growth story as a result of stalling Typhoon exports and high exposure to declining US Army budgets, which disproportionately impact BAE's Land business.’
Blinkx (BLNX.L), the video search group that yesterday lost one third of its value after allegations about the way it generates advertising revenue, recovered slightly, up nearly 10% at 129p. The company refuted doubts made in a blog about its business model. ‘We view the sharp fall in the group's shares as a buying opportunity,’ said Numis analyst Paul Richards.
The £500 million tech stock is a top 10 holding of the top performing Unicorn Free Spirit fund under Citywire AA-rated John McClure and Fraser Mackersie and the Investec Smaller Companies fund run by Citywire A-rated Philip Rodrigs.
Investors await a flurry of data on the European economy later this morning, with updates on the eurozone inflation and unemployment rates. The data will be closely scrutinised ahead of the European Central Bank’s monthly monetary policy decision next week.