FTSE advances as Tesco rallies

By Tricia Wright

LONDON (Reuters) – Britain’s top share index rebounded on Wednesday as investors welcomed Chinese growth data that came in a touch above forecasts, with Tesco among the top risers on results which were better than feared.

China’s economy grew at its slowest pace in 18 months in the first quarter of 2014, official data showed, with signs of waning momentum already prompting limited government action to steady the world’s second-largest economy.

However, the Chinese data, which showed 7.4 percent growth, came in slightly stronger than the median forecast of 7.3 percent in a Reuters poll although it showed a slowdown from growth of 7.7 percent in the final quarter of 2013.

“In terms of where we are focusing our positions and our positive stance, within the emerging markets context we are trying to pick names which are more skewed towards China than the current account deficit economies,” said Ian Richards, global head of equities strategy at Exane BNP Paribas.

The FTSE 100 index was up 31.65 points, or 0.5 percent, at 6,573.26 points by 0812 GMT, having sunk 0.6 percent on Tuesday to post its lowest close in three weeks.

A 3.7 percent rise from retailer Tesco gave one of the biggest lifts to the UK benchmark as it posted full-year results, with traders highlighting in-line trading profit of 3.3 billion pounds ($ 5.5 billion).

“(The market) was pricing in bad, bad news, so in-line is obviously (good),” Joe Rundle, head of trading at ETX Capital, said.

“I think they’re probably finding a bottom around here and I would do a trade of buying Tesco, selling Sainsbury’s. (Tesco is) a massive ship to turn around and it seems like they’re beginning to do it.”

In common with the UK’s three other leading grocers – Wal-Mart’s Asda, Sainsbury’s and Morrisons – Tesco has been outpaced by sales growth at discounters in a fragile economic recovery. Its shares have dropped some 11 percent this year, sharply underperforming the wider market.

While the UK benchmark managed gains on Wednesday, it has posted a loss for the year overall, down around 2.6 percent.

Lofty valuations are keeping investors from putting more money to work in equities. The FTSE 100 is trading on a 12-month forward price/earnings ratio of 13.2 times, against its five-year average of 11 times, Thomson Reuters Datastream shows.

Also acting as a deterrent, analysts have been steadily lowering profit forecasts for UK companies since the start of 2014, data from Thomson Reuters Datastream shows, a signal of potential tough times ahead for the index.

“I think if we see earnings downgrades through the results season against these valuations it’s going to be a problem for markets,” Exane BNP Paribas’ Richards said.

(Reporting by Tricia Wright; Editing by Mark Heinrich)