Market Report: Next is pressured by cautious consumers

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The fashion retailer Next fell back last night, giving way after a broker warned of signs of caution among British consumers.

Traders banked profits after Execution Research circulated the results of a consumer survey conducted earlier this month. The broker's analysis of the results revealed that, despite signs of a recovery in the wider economy, both current and forward-looking consumer confidence deteriorated in September. The perceived average monthly disposable income was down 2.2 per cent year on year, a reversal of the trend seen in recent months. Expectations of redundancy spiked last month, with 15 per cent anticipating the chop, compared with the June peak of 16 per cent.

In a telling change: "It is now those in the public sector rather than financial services and construction that are becoming increasingly concerned," Execution said. On the upside, consumers believe that house prices have broadly stabilised, although of the 4.9 per cent who expect to buy a home in the next 12 months only 1.2 per cent will be first timers.

"Given expected tax rises, consumers are taking a more cautious approach to their spending now that the summer is over," Execution's analyst Caroline Gulliver said. "Even against weak comparatives last year, we have not seen any evidence from our survey that the UK consumer is fundamentally recovering."

Against this grim backdrop, Execution expects retails sales growth to be moderate "at best" next year, "with the risk skewed to the downside, particularly if the VAT rate is raised to more than 17.5 per cent". Reiterating its "underweight" stance on the sector, the broker moved Next, which was down almost 3 per cent or 53p at 1754p, to "hold" from "buy".

Marks & Spencer, which was holding an investor day and closed at 346.9p, down 4.3 per cent or 15.5p, was downgraded to "sell" in the same circular. Home Retail Group, which is rated "hold" at Execution, was 1.9p weaker at 291.1p at the end of play.

Overall, the FTSE 100 fell back 56.02 to 5154.15. The FTSE 250 was also weak, relaxing to 9388.83, down 71.26 points. The market fell back as traders booked profits from Monday's gains. A lacklustre start on Wall Street cemented the trend in the final hours in London.

Tim Hughes, head of sales trading at IG Index, played down the decline, saying that equities may yet flirt with new highs. "It would not be surprising for this latest bout of weakness to tempt in more investors and for shares to bounce back and set fresh 12-month highs," he said.

Among the risers, Lonmin, the platinum miner, stood out, climbing to 1640p, up almost 2 per cent or 31p, amid chatter that it may end up the subject of another bid from Xstrata, down 10.5p at 957.5p, which was rumoured to be ready to walk away from Anglo American, down 20.5p at 2174p.

The banks remained under pressure, with Barclays declining to 360p, down 3.4 per cent or 12.65p, and the Royal Bank of Scotland falling to 46.96p, down 2.4 per cent or 1.14p. Lloyds Banking Group, which once again was the subject of chatter about a possible capital raising, retreated to 89.72p, down 2.1 per cent or 1.89p.

Traders also highlighted the read across from the US financial stocks, where Goldman Sachs was in focus after Meredith Whitney, the widely-followed banking analyst, downgraded the shares to "neutral" from "buy", citing the strong run in the wake of the group's second-quarter results.

Millennium & Copthorne Hotels fell back to 374.2p, down 1.6 per cent or 5.9p, after Goldman Sachs moved the stock to "neutral" from "buy" in a new sector round-up. "Millennium's current valuations looks well beyond likely profitability in 2009 and 2010 and is, in our view, discounting mid-cycle type returns," the broker said. "[It] now trades in line with history on a price to peak earnings basis and price to book basis, which leaves it looking like fair value rather than great value."

Elsewhere, the sugar and sweetener manufacturer Tate & Lyle raced ahead, closing almost 5.3 per cent or 23.7p heavier at 473.8p, after Credit Suisse weighed in, revising its stance on the stock to "outperform" from "neutral".

"Better trading, a 5 per cent-plus yield and a new management story – what's not to like?" the broker gushed, adding the stock to its Europe focus list.

Bank of America Merrill Lynch supported Dana Petroleum, which rose to 1430p, up almost 2 per cent or 26p, after the broker raised its estimates for the company's NAV, or net asset value, by 266p to 1706p following an asset review.

"While, year to date, Dana's exploration effort has had mixed results, we believe that the depth of its North Sea & Egyptian portfolio, along with the company's good risk management, continue to present investors with an attractive risk/reward proposition," the broker said, raising its target for the stock to 1706p to reflect the change in NAV.

Victrex, the hi-tech polymers group, also managed to avoid the downdraft holding back the wider market. The stock gained 3p to 795p after Deutsche Bank upped its target price to 675p from 560p in a European chemicals review.