Last week ended on a high, the FTSE 100 managing a record closing level at 7,560. It bettered that on Monday, driven higher by a resurgent mining sector and broker comment suggesting significant upside at blue-chip medical products and technologies firm Convatec (CTEC). But it didn’t last.
After peaking at 7,582, just 17 points short of a new all-time high, London’s premier index turned tail and hasn’t stopped since.
Up to now, there’s been little to worry about, unless, of course, you’re a Burberry (BRBY) shareholder. New CEO Marco Gobbetti’s Grand Plan to target the super-rich went down like a lead balloon, wiping over 15%, or more than £1.3 billion off its market cap.
Yes, that’s a big hit, but a look at the longer-term chart tells you Burberry shares have rarely been this expensive. They trade on valuation multiples that factor in fast growth.
However, while Gobbetti’s aim is to generate high-single digit revenue growth plus “meaningful” operating margin expansion, the big benefits don’t come through until 2021. Markets are rarely that patient and buyers are few and far between, even at £17.50.
But Burberry is only partly responsible for the FTSE 100’s 120-point decline this week. It’s been a stinker for the retail sector, with Primark causing problems for owner AB Foods (ABF) and M&S's (MKS) clothing division still very much a work in progress.
Another warning from G4S (GFS) sunk the security outsourcer. There seems little hope of a sustained recovery until it sorts out problems or “elevated uncertainty” in the Middle East.
Housebuilders are getting plenty of stick too. Issue here is that so much good news has been baked into prices since the EU referendum none can afford a slip up. Unfortunately, while Persimmon's (PSN) numbers look fine, replacing private sales per site per week with a flat total sales number implies a dip in private sales year-on-year.
At lunchtime Friday, 85% of the FTSE 100 is in the red for the week. That said, and while there are some big losers, it is not time to panic.
As we see in the chart above, the blue -chip index is up almost 400 points, or 5.3% in the past two months. It’s due a pause, then, and horse-trading over the detail in Donald Trump’s draft tax bill is causing some traders to take money off the table.
Markets do not like a proposal to kick a cut in the US corporate tax rate to 20% from 2018 into 2019. Given a cut is already priced into valuations, anything that might delay benefits to US company earnings risks providing food for the bears.
The big number for Footsie watchers right now is 7,450. There’s a very visual line of technical support around that level, and we’re currently seeing buyers move in at that price.
A break much below 7,450 would give greater cause for concern, certainly according to interactive investor’s technical analyst Alistair Strang who this morning mentioned 7,400, then 7,310 points as next support should selling gather pace.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.