Market Report: Next takes a bashing from Morgan Stanley

Morgan Stanley prompted an exodus from Next yesterday after the heavyweight broker turned bearish on the retailer and sent its shares 20p lower to 1,510p. It not only urged investors to abandon Next but advised them to switch into its rival Marks & Spencer, up 6.5p to 485.5p.

Morgan Stanley fears that 2006 will be a tough year for Next and so has slashed its earnings forecasts for the retailer by 7 per cent. It worries that the group is too exposed to spending by 25 to 45 year olds who are likely to see their finances come under pressure next year as many find they simply cannot take on any further debt.

The US broker also believes the "safe, middle-of-the-road clothing" offered by Next is no longer in tune with the way the UK clothing market is developing. For a decade, Next has had great success by simply re-working the previous year's fashion themes one season. But now it finds itself up against rivals such as H&M, Primark and New Look which are able to get catwalk fashion into high street stores much quicker than before.

Such pressure on Next is unlikely to ease. In fact, Morgan Stanley expects it to intensify. And although the consensus in the City suggests that Next shares are relatively cheap compared with M&S, the US broker still believes investors should pile into the latter. "We have been off the pace in not upgrading M&S earlier. However, we still see upside potential in the share price as we believe that consensus earnings (for M&S) are too low," said Morgan Stanley, which raised its profit forecasts for the group by 8 per cent for next year.

Although M&S shares have soared by almost 30 per cent in the last three months, it is convinced that they have further to go and so slapped an "overweight" rating on the stock and a price target of 510p.

The wider FTSE 100 lost 15 points to close at 5,501. Utility players were in demand amid speculation that the Swedish electricity giant Vattenfall is on the look out for acquisitions in the UK. National Grid rose 7.5p to 552p, Scottish & Southern Energy added 11p to 993p and Centrica ticked 1.5p higher 238.75p in response. Vattenfall, which boasts annual sales of more than €12bn, is reported to have retained the corporate finance house NM Rothschild to advise it on acquisitions.

Meanwhile, dealers suggested that a group of hedge funds were busy yesterday targeting stocks which have sizeable bear positions. Among them was MFI Furniture, 1.25p higher to 76.25p, and Carpetright, 17p better at 1,006p, which are known to be among the most heavily shorted stocks in London. The practice is know as "hunting for shorts" and sees market operators such as hedge funds pile into the likes of MFI and Carpetright in the hope of panicking the bears into closing their positions.

These operators can make big profits from this tactic because as bears rush to close they tend to force that share price higher. Losses for bears can quickly spiral, which is exactly what the original hunters want. The stock market is a zero sum game, meaning one man's loss is another man's gain. In this instance, the bear's losses are the hunter's profit.

Soco International jumped 12p to 785p as Seymour Pierce suggested that bullish drilling news is on the way from the oil group in the near future. "We think it likely the company will be in a position to deliver further good news over the next few months from its drilling programmes in Vietnam and Yemen," said the broker after discussions with Soco's management.

Brandon Hire added 4.5p to 142p on talk of strong trading at the tool hire group. House of Fraser dropped 3p to 106.25p amid worries that the department store operator is struggling at present.

Sector Guard ticked 0.25p higher to 3.87p after the security services group unveiled a 17 per cent rise in annual sales and a doubling of its dividend. Grasshopper Investments added 0.5p to 18.5p on news that the group is planning the purchase of Go Industry, an industrial machinery and equipment auctioneer. The deal, to be structured as a reverse takeover, will value Go at £30m. Griffin Mining rose 4.5p to a fresh all-time high of 61.25p amid strong institutional demand for the China zinc producer.

Finally, Serica, the international exploration player with assets in the North Sea, Indonesia and Spain, will today become one of this year's biggest AIM's oil floats.

Led by Tony Craven, who was responsible for building up Monument Oil & Gas before its 1999 takeover by Lasmo for £600m, Serica will raise £64m of new money at 95p, giving the group a market value of £135m. Brokers are expecting the stock to go to a premium on its maiden session.