FTSE edges up but investors eye profit-taking potential

Fri Oct 25, 2013 10:54am EDT

* FTSE 100 up 3.61 points at 6,716.79

* G4S gains as HSBC upgrades and floats breakup potential

* RBS boosted by Carney's softer tone on banks

* BSkyB falls as Macquarie downgrades on earnings worries

By David Brett

LONDON, Oct 25 (Reuters) - London's blue chip index inched higher into the close on Friday, as traders pondered whether to buy into a market near multi-year highs or take profits on a sluggish recovery in earnings.

By 1424 GMT, the FTSE 100 was up 3.61 points at 6,716.79, just 1.8 percent off 13-year highs hit back in May. The index slumped in June but has since climbed almost all the way back as concern over an imminent withdrawal of monetary stimulus, a big driver for equities, has faded.

Volumes were anaemic, just 50 percent of their 90-day daily average, suggesting many investors were staying out of the market.

Valuations are above their 10-year average. On a 12-month forward price-to-earnings ratio, they have risen 16 percent since mid-June to 12.6 times, according to Thomson Reuters Datastream, potentially curbing the traditional end-of-year rally.

"A year-end rally may not happen because investors are too tempted by year-to-date profits. The selling if it is not already under way by the U.S. Thanksgiving Holiday (Nov. 28) could snowball from then," said Alistair Winter, investment strategist at Daniel Stewart.

Although not overly stretched, earnings, which are still in downgrade territory, remain a concern according to Hartmann Capital trader Basil Petrides.

"Although the markets are grinding slowly higher, we are due a correction if the Christmas rally happens," Petrides said.

Fifty-seven percent of European companies have so far beaten or met earnings expectations for the current quarter, roughly in line with the previous three quarters, Starmine data showed.

Technical analysts said that while the index might encounter some near-term consolidation, charts showed scope for continued gains over the coming weeks.

Valerie Gastaldy, head of technical analysis firm Day By Day, noted that the FTSE 100 is slowly breaking out of a consolidation pattern that has August and September peaks as its upper levels.

"It should quietly move back to its all-time high (6,950.60) by the end of November or so," she said.

With the market only marginally higher, the drivers among sectors were mixed, although M&A was a theme among top gainers.

British Land added 0.4 percent with traders noting speculation that the real estate investment trust could be a 900 pence-per-share takeover target from a sovereign wealth fund.

An upgrade from UBS helped too, after the Swiss bank raised its rating on the stock to "buy" from "neutral", lifting its target price to 680 pence from 630 pence.

G4S climbed 2.6 percent, with traders citing an HSBC note in which the investment bank upgraded the security services firm to "neutral" from "underweight" and talked up the break-up value of the group, as the catalyst.

The world's biggest security services firm said its UK chief executive Richard Morris had resigned at a time when the group was trying to recover from a series of damaging setbacks.

UK lender Royal Bank of Scotland rose 4.1 percent, rebounding after the previous session's falls. Traders said Bank of England governor Mark Carney's speech, striking a new, softer tone on banks, had helped lift the shares.

BSkyB was the top FTSE 100 faller, down 2.2 percent with traders citing a note from Macquarie, in which the broker cut its rating to "neutral" from "outperform" on concerns that a coming auction for rights to show Champions League football could hit earnings.

"With limited upside from current share price levels, potential for negative sentiment coming from another aggressive rights auction, and risk in the coming quarters that BT begins to impact BSY's broadband growth as marketing levels are sustained, we see 5 percent downside," Macquarie said. (Reporting by David Brett; editing by Andrew Roche)