* FTSE 100 flat, hit 14-year high in previous session
* Supermarkets gain as investors back defensive stocks
* FTSE looking precarious at current levels-analysts
By Tricia Wright
LONDON, May 16 (Reuters) – Britain’s top shares traded flat on Friday, kept buoyant by supermarket stocks, as doubts intensified over whether the current lofty equity market valuations were justified.
Wm Morrison led the market higher, up 4.4 percent, followed by Sainsbury (Berlin: SUY1.BE – news) , 3 percent firmer, while Tesco (Frankfurt: TS3.F – news) was the sixth top riser, 0.9 percent stronger.
The sector built on gains seen in the previous session when there was a strong bias towards defensive stocks, which often lag when markets rise, supporting a view that the good times will not roll for long.
Morrisons’ advance was helped by mounting speculation that a U.S.-led private equity consortium was weighing a bid for the company, traders said, with the Daily Mail’s market report noting talk of a possible 6.4 billion pound ($ 10.8 billion), or 275 pence a share, cash offer. Morrisons declined to comment.
Morrisons is also the fifth most shorted stock on the UK benchmark, while Sainsbury’s, which has been mentioned repeatedly as a bid target in the past, is the second most shorted, Markit data shows.
The FTSE 100 was up 1.03 points – flat in percentage terms – at 6,841.92 points by 0813 GMT, having dropped 0.6 percent in the previous session, taking its cue from Wall Street which sold off after results from Wal-Mart disappointed.
The declines seen on the UK benchmark in the previous session came after it reached a 14-year high earlier that day, at 6,894.88 points, an area which has acted as resistance on a couple of occasions this year.
“Traders are probably reluctant to push it through 6,900 at the moment as the latest push has coincided with evidence of topping-out in U.S. markets,” Charles Stanley (LSE: CAY.L – news) analyst Bill McNamara, said.
While cautiously optimistic on the UK market in the near term, McNamara reckoned that if the FTSE 100 stalls there could be a quick reversion to around 6,750, some 1.3 percent below current levels.
Frothy valuations are stopping investors from putting more money to work in equities. The FTSE 100 is trading on a 12-month forward price/earnings ratio of 13.7 times, against its 10-year average of 11.7 times, Thomson Reuters Datastream shows.
“The recent defensive rotation in equity markets underscores our view that the wider risk-on rally now looks tired,” Graham Bishop, senior equity strategist at Exane BNP Paribas, said.
Some traders reckon the UK benchmark will sell-off in the near term, and will fail to make much headway until at least mid-year, allowing earnings to catch up after what has proved a lacklustre corporate results season.
With 88 percent of the reporting season wrapped up, 50 percent of STOXX Europe 600 companies have missed analyst profit forecasts, StarMine data showed.
“Whilst technically and fundamentally we remain bullish, light volumes and a lack of drivers in the near term indicate we are due a correction,” Mike McCudden, head of derivatives at Interactive Investor, said.
($ 1 = 0.5954 British Pounds) (Additional reporting by James Davey; Editing by Janet Lawrence)