March 13, 2014 / 6:20 PM / in 4 years

UPDATE 1-European shares hit 5-week closing low on China, Ukraine jitters

* FTSEurofirst 300 down 1.1 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 hit a five-week closing low on Thursday as worries over economic growth in China and tension in Ukraine took their toll on market sentiment.

A broad sell-off among UK retailers, after a profit warning by supermarket Morrison‘s, also contributed to the downward momentum.

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.

Developments in Ukraine before Sunday’s referendum in Crimea, which some fear could bring harsh Western sanctions against Russia, also prompted many investors to sell out.

European shares extended losses in late trade after Ukraine’s acting president said that Russian forces were concentrated on the border “ready to invade”, although he believed international efforts could end Moscow’s “aggression” and avert the risk of war.

IG market analyst Chris Beauchamp said he did not expect to see much progress in equity markets “certainly into next week.”

The FTSEurofirst 300 index of top European shares closed down 1.1 percent at 1,293.35 points, its lowest close since February 6. The index has slipped more than 4 percent since late February.

Nonetheless, strategists remained bullish on the longer-term outlook for European equities, suggesting 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,” said Gerry Fowler, global head of equity and derivatives strategy at BNP Paribas.

“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 11.9 percent and prompted worries about an industry price war which would eat into profits across the board. Rivals Sainsbury’s and Tesco lost 8.5 percent and 5 percent respectively.

German potash miner K+S sank 9.9 percent after saying it expected 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.

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, and some investors wonder whether profits will be strong enough to justify the strong run-up in share prices.

“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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