Miners drag FTSE lower

Britain's top shares extended losses on Tuesday, led by the mining sector as the cloud looming over the euro zone darkened after Greek politicians failed to form a government, denting sentiment and the outlook for global growth. London's bluechip index fell 0.5 percent to 5,437.62, adding to the previous session's 2 percent drop, with anxiety increasing that Greece might leave the euro zone.
Reflecting concerns that the euro zone crisis will deepen the recession in Europe and do serious damage to the outlook for corporate earnings, the FTSE volatility index - a crude gauge of investor fear - has spiked more than 100 percent since Spain said it would need to scale back its austerity plan in mid-March.
"With the resumption of sovereign debt concerns, investing is again akin to playing chess on three levels - the micro, macro and political - with a myriad of different outcomes and probabilities," Neil Veitch, fund manager, SVM UK Opportunities fund, said. Veitch, while acknowledging the short-term hurdles, is bullish on equities as company results continue to moderately surprise on the upside and valuations are cheap.
Should the global recovery falter further then politicians and central bankers with respond with additional policy moves, inflating asset prices, he said. A slump in German analyst and investor sentiment in May and mixed data in the US, where April retail sales hinted at slower spending pace while a gauge of manufacturing in New York state bounced higher in May, did little to boost sentiment.
Miners, which rely heavily on demand from the US and China, which is the most voracious consumer of raw materials and has seen its growth slow this year, were the sharpest fallers. Growth worries led UBS to cut its earnings forecasts for Kazakhmys, down 4.1 percent, by up to 20 percent between 2012-14 and repeat its "sell" rating on the miner.
The mining sector is down 20 percent in 2012, hit by concerns over rising costs and slowing demand, and is in oversold territory for the first time since August 2011 just before UK stocks began to rally. "Historically, mining sector breadth has been a very useful and accurate aid to detecting turning points in the London market given mining stocks' sensitivity to global macro factors ... (but) the sector needs to overcome significant inertia if it is to move forward from here in the near term," analysts at Silverwind Securities said.
The broader FTSE 100 has fallen 9 percent since mid-March, while banks and insurers, which are most exposured to the changing fortunes of the euro zone, have shed up to 10 percent in the last three months. Both sectors were lower again on Tuesday with insurer Aviva falling 2.9 percent, weighed by an earnings downgade by BofA Merrill Lynch, which said it was too early to turn positive on the stock.
The index's top faller was International Airlines, down 6 percent, as J.P. Morgan cut its rating on the firm to "neutral" from "overweight", seeing more near-term upside elsewhere in the sector. Credit checking firm Experian shed 2.9 percent after Credit Suisse cut its rating to "neutral" from "outperform" following recent full-year results. Profit-takers moved in on Serco, up 14 percent in 2012 but down 2.3 percent on Tuesday after the outsourcing firm said it was on track to meet 2012 expectations.
"Given the stock market's present mood we see the group's reliance on H2 as a negative and it is unlikely the share price will make progress until there is more tangible evidence of greater organic growth, no further deterioration in the US and the planned improvement in H2 margins," Numis said in a note.
The broker said it preferred Babcock International and Capita in the sector. Babcock was up 8.7 percent boosted by strong full-year results, which led both Jefferies and Liberum Capital to hike target prices for the stock. G4S and Smiths Group were in demand, up 3.2 and 1.5 percent respectively, after trading updates.
Despite worries over the earnings outlook, the five-year forward earnings per share compound annual growth - the amount an investment is forecast to return over a given period - for developed European companies is estimated at 6.7 percent, and should be stable providing there is no break-up of the euro zone, a strategist at a UK investment house said.