Britain's top share index slipped on Tuesday, hurt by testing firm Intertek on worries over a slowdown in its business, though analysts were confident that technical support would cap any weakness in the broader market. Intertek, a company specialising in safety and quality tests, fell 2.5 percent after saying headwinds experienced in the first half of the year have continued into the second half.
Shore Capital kept a "sell" recommendation on Intertek, arguing that the company may have more downgrades to forecasts. The FTSE 100 closed down 25.45 points, or 0.4 percent, at 6,698.01 points, retreating further from a five-month high of 6,819 hit on October 30. Volumes were light, with the index having traded just over three-quarters of its 90-day daily average. "Any downward drift I think is going to be a buying opportunity. You've got layered support," Lynnden Branigan, analyst at Barclays Capital, said, referring to the November low at 6,613, the 50-day moving average at 6,607, and the 100-day moving average at 6,565.
Valuations on UK equities are still above long-term averages, having gained nearly 14 percent in 2013 on huge quantities of cash pumped into the financial sector by central banks. The FTSE 100 now trades on a 12-month forward price/earnings ratio of 12.7 times, above its 10-year average of 12 times, Thomson Reuters Datastream shows. This is despite downbeat corporate results. Nearly two-thirds of European firms have missed revenue expectations in the current quarter, while 48 percent have missed forecasts at the profit level, Thomson Reuters Starmine shows.
Some analysts believe that in 2014 the main driver for stocks will be a further improvement in the global economy rather than rising valuation multiples. "I think that in 2014 it will not be price/earnings ratios that will take the lead but fundamentals, and I shall compare it with a cocktail with a little bit less alcohol and with better ingredients, so it's much more stable," said Patrick Moonen, senior multi-asset strategist at ING Investment Management.
He said that cyclical sectors still have further room for outperformance. Budget airline easyJet jumped 7.1 percent after it underlined its growing advantage over struggling Irish rival Ryanair, reporting annual profit at the top end of forecasts and returning cash to shareholders. And engineer Amec rose 1.5 percent after saying trading had been boosted by strong performances in the UK North Sea and the US Gulf of Mexico. George Godber, who runs Miton Group's UK Value Opportunities Fund, said valuations in the market have become stretched but he too sees opportunities in cyclicals, namely from miners boosted by ambitious economic reform plans in top metals consumer China.