Market Report: Competition worries weigh on Home Retail

Home Retail Group, the company behind the Argos and Homebase chains, was under pressure yesterday, edging lower as the broader FTSE 100 index attempted to recover from Thursday's sell-off.

The stock touched a session low of 286.4p, down nearly 5 per cent, after Goldman Sachs said the company faced significant challenges in the form of growing competition, ongoing pressure on gross margins and a high and fixed cost base. Taken together, these factors "will hinder an improvement in returns", which in turn is likely to hold back the share price, the broker explained, moving its recommendation to "sell".

"We believe that the competitive position of Home Retail Group has weakened and that there is an increased threat from supermarkets, online competitors and new entrants, in particular in Argos's core catalogue segments, notably electricals," Goldman said, scaling back its 12-month target price for the stock to 301p from 341p. At the close, Home Retail was 2.2p weaker at 298.4p.

The broker also revised its stance on Next, the high street fashion retailer, down 15p at 1989p. Citing the recent strength in the stock, Goldman moved its recommendation to "neutral" from "buy", saying that while there was some upside to its 2342p target, other players offered better value. Burberry, which was upgraded to "neutral" from "sell" in the same review, was 9.5p higher at 572.5p at the end of play. "The efforts made by [Burberry] to improve cash management have paid off, leading to rising returns," the broker said, pointing out that stock had done well off the back of better than expected quarterly and interim results.

Elsewhere, Kesa Electricals, which touched a session low of 150p, was 2.1 behind at 154.8p after Goldman said that, like Home Retail Group, it faced a number of structural challenges. Moreover, following a period of outperformance, a cyclical recovery fully priced into the stock.

Overall, the FTSE 100 rose by 1 per cent or 51.6 points to 5245.73, while FTSE 250 index rallied by 1.7 per cent or 151.02 points to 9031.54, as traders said the sell-off on the day before may have been overdone, although many remained concerned about the Dubai government's decision to ask creditors for two of its biggest companies for a debt standstill agreement. Analysts also seemed more relaxed, with SocGen, for instance, saying that Thursday's sell-off was "a classic risk aversion reaction", adding: "At this stage, this setback looks to be one that is very much country specific and very much an 'echo' of the entire mess that we are exiting."

The state of the banking sector reflected the changed mood, with the Royal Bank of Scotland rebounding to 34.725p, up 5.2 per cent, or 1.73p, and Barclays rising by 2.3 per cent, or 6.75p, to 297.85p. Lloyds Banking Group was held back, down 0.55p to 58.6p, but this was put down to technical reasons related to the group's share issue. HSBC was broadly unchanged at 706.3p, up 0.7p. Standard Chartered was similarly unmoved by the day's activity, rising by 6p to 1520p.

The rebound took place as JP Morgan said it was less concerned for global banks than about the knock-on impact within the UAE, adding: "In our view, the exposures to Dubai World debt are relatively limited, and are less of a concern compared [to] the spillover effects for related entities, corporates in the UAE region and potential refinancing issues."

Like the banks, commercial property companies also regained their composure as fears of a fire sale of Dubai-owned real estate assets subsided, with Liberty International rising to 482p, up 8.9p, and Land Securities gaining 10p to 670.5p. British Land was 9.8p ahead at 459.8p, and Hammerson rose to 411.2p, up almost 3 per cent, or 11.7p.

In the insurance sector, Legal & General recovered, rising by 2.45p to 80.95p after Nomura raised its target price for the stock to 125p from 115p. Panmure Gordon also weighed in, reiterating its "buy" stance following an overnight meeting with the life insurer's finance director, Nigel Wilson, and head of strategy, Matt Hodson.

"The key messages for us were that the capital position is strong (and getting stronger), the cash position is good (and getting better) and the business is focused on better margined products," the broker said, adding that it was pleased with measures to "demystify the business model and simplify the investment case", which should pay dividends over the medium and long term.

In the oil & gas space, Morgan Stanley supported sentiment around BG, which gained 18.5p to 1126p after the broker reiterated its "overweight" stance. "We think the roughly 14 per cent underperformance versus the sector since April offers a good entry point ahead of the annual strategy update on February 5," the broker said, adding that in its view, the BG investment case "remains unique", with increasing exposure to oil price-linked gas markets, amongst other supportive factors.

Further afield, ITV rose 1.6p to 53.1p after the broadcasting group announced that Archie Norman, who will take over as chairman at the beginning of January, had bought 380,000 shares at 51.87p apiece.