Market Report: Retail sector hit by pre-Christmas discounts

Home Retail Group, the owner of the Homebase home improvement chain, slumped to the bottom of the Footsie last night as the retail sector turned lower amid growing concern about the impact of the flood of discounts on the high street.

Analysts at Singer Capital Markets said that the margin performance this year "could well be the worst on record" given research that 82 per cent of the 100 largest retailers were discounting before Christmas.

There was also concern about a drop-off in demand in January, after the current spate of offers runs out.

"We continue to believe that a reversion to normal discretionary times will leave retailers' sales back at very depressed levels again," Singer said, highlighting recent comments from Begbies Traynor, the insolvency specialists, that 10 to 15 national chains may fail before mid-January.

Nick Bubb, retail analyst at Pali International, also weighed in, warning: "If you thought the current level of discounting on the high street is unprecedented and that the rising number of retailing bankruptcies is unparalleled, then just you wait until January".

The grim prognoses depressed sentiment across the sector. Home Retail – which began trading on the FSTE 100 after the changes in the recent index review were implemented – was the hardest hit, falling to 204p, down 13.01 per cent or 30.5p.

B&Q-owner Kingfisher was down 5.09 per cent or 7.1p at 132.3p while Marks & Spencer retreated to 220.75p, down 2.21 per cent or 5p.

"M&S should survive the downturn, but investors have to appreciate that we have not yet got to the bottom of the alarming earnings and dividend decline it will suffer over the next two years...," Mr Bubb said, reiterating his "sell" rating for the stock.

Overall, with only one and half trading days to go before Christmas, volumes remained low and the FTSE 100 was down 37.77 points at 4,249.16.

The mid-cap FTSE 250 index – considered more representative of the domestic economic situation – was down 53.6 points at 6,231.5.

Bargain hunters drove the insurance sector, which dominated the FTSE 100 leader board with Friends Provident at first place, up 5.58 per cent or 4.3p at 81.3p, and Old Mutual, at second place, advancing to 52.9p, up 5.17 per cent or 2.6p.

Cairn Energy climbed to sixth place on the Footsie, up 4.33 per cent or 80p to 1928p, after its Indian unit announced an oil and gas discovery near an existing field in the Indian state of Rajasthan.

On the second tier, Citigroup reduced its target price for Cattles, down 31.75 per cent or 5p at 10.75p, to 18p from 36p, arguing that the company's bank debt maturing in 2009 represented the "biggest hurdle to 'normal operations'".

Analyst Haley Tam added that it was likely that the Financial Services Authority, the UK market regulator, "will not progress the [company's application for a banking licence] until refinancing terms on some or all of the group's £500m debt maturing in July have been agreed".

"We believe the scene is set for further increases in arrears and loan losses, and uncertainty on the funding and banking licence front," she said.

Elsewhere, Citi downgraded engineering group IMI, down 11.95 per cent or 35.25p at 259.75p, to "hold" from "buy" in a new sector review.

The broker said that, "at the earliest", it does not expect earnings forecasts for UK engineers to touch bottom before the second half of 2009,adding: "While valuation is attractive, history suggests that a sustained rally is not likely to be achieved before earnings trough."

Punch Taverns was down 6.97 per cent or 4.25p at 56.75p following reports that Global Pub Company, the 425 leased and tenanted pubs group owned by Robert Tchenguiz's R20 investment vehicle, was about to enter talks debt talks with lenders and bondholders owing to fears that it may breach its banking covenants. Cazenove said the read-across was for other leased/tenanted pub companies was negative "as it suggests that Globe's trading has failed to stabilise despite weak comparators in [2008]".

On the upside, Lonmin has a strong start to trading on the FTSE 250.

The platinum miner, which was kicked out of the FTSE 100 in the recent index review, surged to 880.5p, up 11.24 per cent or 89p, as investors moved to capitalise on recent losses.

Among smaller companies, Pure Wafer, the Swansea-based silicon wafer reclaim services provider, jumped to 6.5p, up 30 per cent or 1.5p, after confirming receipt of preliminary bid approach.

The approach overshadowed news of £800,000 in pre-tax losses in the company's preliminary results.