… Following the sizeable rally at Marks & Spencer, the shares currently trade on forward earnings of 14.1x, which puts them on a hefty premium to the sector.
A glance at the above chart of the FTSE 100 shows the fragility of equities, as renewed concerns over heavily indebted economies created a wave of risk aversion across global markets this week.
Dubai has been at the centre of debt market concerns recently, with their main equity index declining almost 30% in the last ten days. Moody’s, the credit rating agency, has this week downgraded a further six of Dubai’s government-related issuers, raising fears that Dubai World may have just been the tip of the iceberg.
Furthermore, fears of contagion have already started spreading across global markets, with Greece, Spain, Portugal and Ireland coming under pressure. Fitch rating agency cut Greece’s sovereign debt rating to triple B plus and kept a negative outlook on the Eurozone’s weakest members. Standard and Poor’s rating agency also revised its outlook on Spain from stable to negative, which sent another shock wave through Europe’s smaller economies.
A bout of worse than expected global economic data also rattled investors. Weak unemployment data from a number of European economies and lower than forecast third quarter growth in Japan, caused investors to take profits from what has been a great year for equities.
Technical analysis highlights the various support and resistance levels seen on the blue chip index. Initial support at 5190 appears to have held again this week, so the trend remains higher for the time being, with a near term target at the 61.8% Fibonacci retracement level of 5495.
However, it is worth noting that the relative strength index (RSI) is trending lower, which indicates that the momentum is gaining to the downside. This can be seen recently by the total volume of shares traded on the FTSE being significantly higher on down days than on positive days.
In summary, I am growing increasingly cautious that the extensive rally in equity markets experienced since March could be faltering. Economic data has started to fall below investors inflated expectations and country specific debt downgrades has provided a real reminder of the strong headwinds faced by many economies. A break above 5400 is need to prove the upward trend remains intact, otherwise I can envisage support at 5190 giving way and 5000 coming under pressure.
One of the top performing sectors in 2009 has been the general retailers, with the sector average gaining around 80% this year, versus an equivalent gain of 18% on the FTSE 100.
The housing market has temporarily turned around, with prices rising rather than falling and lower mortgage rates has led to an increase in disposal income to many homeowners. Sentiment has also been boosted by the soft base for comparison provided by the extremely weak second half of 2008, as like-for-like sales growth shows a vast improvement in sales.
The confederation of British industry (CBI) has forecast sales in the forth quarter will be better than last year and the Christmas trading updates will be awaited with optimism, as brokers share a bullish stance on the sector.
However, this bullish consensus and vast outperformance suggests that expectations are extremely high and much is now factored into these valuations. Marks & Spencer (Epic: MKS), one of the UK’s leading retailers, has been among the top performers, with the share price gaining around 90% this year.
The above two year chart of Marks & Spencer highlights the gains experienced this year, as the share price approaches the levels seen pre-credit crunch.
The trend is undeniably higher, with both moving averages steadily inclining. However, historic resistance at 424p is likely to provide a stumbling block and the oscillators suggest the share price may be too high. Both the RSI and Stochastic are trading in overbought territory and are showing signs of rolling over, which is a bearish signal.
Marks & Spencer released interim results on the 4th November that said margins would decline in the second half of the year despite improving trends and the absence of discounted pre-Christmas promotions, which were seen last year. This reflects more competitive pricing and the impact of sterling’s weakness on imports, an aspect that is extremely important in clothing.
Furthermore, consumer confidence remains fragile and further recovery may be limited until the unemployment rate starts to fall. Chancellor of the Exchequer Alistair Darling, recently suggested that unemployment would continue to rise for some time and could reach 3 million in 2010. This could lead to a retracement in equities next year, before the economy finally improves in 2011.
Retail sales data this week unveiled a disappointing November for the UK high street, according to the British retail consortium (BRC). Like-for-like sales grew by 1.8% in November compared to the same month last year and were significantly below the 3.8% gain in October. Also, recent figures from research group Experian showed that shopper numbers over recent weeks were down on last year, which was a poor year historically.
Following the sizeable rally at Marks & Spencer, the shares currently trade on forward earnings of 14.1x, which puts them on a hefty premium to the sector. Negative growth is forecast for 2010 and minimal growth for 2011, so the valuation looks stretched at current levels. In comparison, Next trades on a respective 11.6x and both Moss Bros and French Connection are forecast to be loss making for the next few years.
In light of our earlier analysis of the FTSE and the weak fundamental and technical analysis discussed for Marks & Spencer, I am inclined to suggest the shares are too high.
At the time of writing the share price is 400p and I believe the shares will move lower as we move into 2010. Near term targets are seen at 380.5p, 367p and 347p, with a stop loss marginally above historic resistance at 426.5p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Marks & Spencer, but client accounts may. The material in this report has come from Simply Charts and Marks & Spencer’s corporate website.