* FTSE 100 down 0.1 pct, 40 points below 8-month peak
* UK jobless data fuels rate hike expectations
* Analyst downgrades flag earnings, valuation concerns
By Toni Vorobyova
LONDON, Jan 22 Britain's FTSE 100 eased off
8-month highs on Wednesday after strong jobs data raised the
spectre of interest rate hikes and analysts highlighted concerns
about companies' weak earnings and high valuations.
Data showed the unemployment rate dropped to 7.1 percent in
the three months to November, below even the most optimistic
analyst forecast and just a decimal point above the threshold
where the Bank of England has said it may think about raising
Although the strength in job creation is good news for
British business, the prospect of higher rates is not, as it
will increase borrowing costs for companies and consumers alike
and reduce the appeal of equity investments.
"We are in the phase of the economic cycle where you are
recovering with spare capacity. But at some point you will run
out of slack. We are approaching that period but we are not
there yet," said Steven Bell, director of global macro at F&C
"It's still positive for equities but we are moving into the
space where the biggest trade is to be short bonds."
Bell's own positions include a modestly long one on global
equities and a short one on British gilts, whose prices fell on
Wednesday as the market moved to price in a hike sooner.
The FTSE 100 share index, meanwhile, closed down 7.93
points, or 0.1 percent, at 6,826.33 points, holding
around 40 points below Tuesday's eight-month high and lagging
euro zone's EuroSTOXX 50.
EURO ZONE PREFERENCE
"We expect a modest economic recovery and tend to favour the
markets where the central banks are late, and in our scenario,
the first central bank to tighten policy will be the Bank of
England," Ibra Wane, senior equity strategist at Amundi, said.
"That's why, despite the fact that the economic situation is
stronger than in the euro zone, this market is not on the top of
our list. We would rather prefer the euro zone equity market."
Analyst downgrades were behind most of the key single stock
fallers on the FTSE as they raised concerns about the weak start
to the earnings season and the stretched valuations.
Royal Bank of Scotland fell 3.1 percent after UBS
downgraded the stock to "sell" from "neutral", saying that the
share price already reflected much of the progress that they
think the group will make in the next 18 months.
While company-specific, such concerns underscore a broader
trend of stretched valuations, with analysts saying that company
earnings now need to show strong growth to justify any further
gains in share prices.
So far, though, the company updates are not really
delivering. Brewing giant SABMiller fell for a second
day as Tuesday's disappointing sales figures translated into
price target downgrades from the likes of Credit Suisse, Exane
BNP Paribas and Deutsche Bank.
Meanwhile, shares in William Hill, which issued a trading
update last week, suffered after HSBC cut its price target to
350 pence, which was below current levels.
"Valuation is not compelling, given threats to earnings, and
we see little to attract the marginal buyer," it said in a note.
Overall, Thomson Reuters StarMine SmartEstimates predict
that FTSE 100 companies will on average miss consensus 2013
earnings expectations by 0.8 percent, based on the up-to-date
forecasts from the historically most accurate analysts.
As such, investors rewarded companies able to deliver, with
software specialist Sage Group up 3.3 percent after confirming