Europe extends two-week slide on China, Ukraine jitters

Thu Mar 13, 2014 12:22pm EDT

* FTSEurofirst 300 down 0.6 percent

* Worries over Chinese growth, Ukraine weigh on sentiment

* Morrison's warning sets off sell-off among UK retailers

By Tricia Wright

LONDON, March 13 (Reuters) - European stocks fell on Thursday, extending a two-week slide, as worries over economic growth in China and tension in Ukraine took their toll on market sentiment.

A sell-off among UK retailers after a profit warning by Morrison's also kept investors on edge.

Concern about China intensified after data showed its economy slowed markedly in the first two months of the year. Growth in investment, retail sales and factory output have all dropped to multi-year lows.

Investors were also wary about developments in Ukraine before Sunday's referendum in Crimea, which investors worry could bring harsh Western sanctions against Russia.

Germany's Angela Merkel warned Moscow that it risked "massive" political and economic damage if it refused to change course on Ukraine, saying Western leaders were united in their readiness to impose sanctions on Russia if necessary.

"Investors are just concentrating on China and the Ukraine," IG market analyst Chris Beauchamp said. "I don't think we'll see much progress (in equity markets) at all... certainly into next week."

At 1601 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,298.95 points. The index has slipped about 4 percent since late February.

Despite the recent pull-back, strategists remained bullish on the longer-term outlook for European equities. They said shares should continue to benefit from investment inflows supported by expectations of a strengthening global economy.

"European equities ... remain relatively under-owned globally. We know that there are still flows away from emerging markets which we think will persist and that money needs to find a new home. (It is) more likely to go into European and Japanese equities than U.S. equities," Gerry Fowler, global head of equity and derivatives strategy at BNP Paribas, said.

"We think there may well be allocations out of U.S. equities from pension funds who are overweight and they may put that money into Japanese and European equities."

UK retailers dropped after Wm Morrison cut its profit outlook, which sent its shares down 11.2 percent. Rivals Sainsbury's and Tesco lost 8 percent and 4.6 percent respectively.

German potash miner K+S sank 8.8 percent after saying it expects operating earnings to fall for a third straight year. Prices for the fertiliser ingredient have dropped following the break-up of an export alliance between two larger rivals.

Alongside the concerns over China and Ukraine, investor worries were focused on corporate earnings and whether profits will be strong enough to justify lofty valuations after a strong run-up in share prices.

The STOXX Europe 600 is trading on a 12-month forward price/earnings ratio of 14 times against its 10-year average of 11.9 times, Thomson Reuters Datastream shows.

"Earnings do need to catch up a bit with valuations," said Paul Sedgwick, head of investment at Frank Investments. "Maybe this year will be a case of markets pausing for breath; they have had a good run."

Sedgwick holds companies with strong balance sheets, diversified business models and decent dividend policies, including German agrochemicals and seeds maker BASF, German engineer Siemens and British consumer goods group Reckitt Benckiser.

Europe bourses in 2014:

Asset performance in 2014:

Today's European research round-up

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