Europe: Defensives drag shares lower, Pearson drops after stake sale

[LONDON] European shares ended Tuesday on the backfoot as losses among defensive consumer staples and real estate stocks outweighed strength in autos and miners.

The pan-European STOXX 600 was down 0.7 per cent at its close, while euro zone stocks and blue-chips fell 0.4 per cent, in muted trading punctuated by early earnings updates and more corporate deal-making.

Consumer staples including food and drink companies and household goods weighed, with real estate stocks also falling 1.2 per cent.

Auto stocks were a bright spot, up 1 per cent, after data showed Chinese passenger car sales rose.

"We note that defensive equity sectors earnings have generally weakened while cyclical sectors keep their positive momentum," said Valentin Bissat, equity analyst at Mirabaud Asset Management. "Overall for the region, the equity risk premium has decreased, which in turn increases companies' buybacks, a trend which is likely to continue in the short term as reduced uncertainties and a cyclical recovery decrease the necessity to hold liquidity in cash," Mr Bissat added.

Basic resources was the only other sector in positive territory, up 0.5 per cent as metals prices gained.

Pearson wiped out early gains to fall to the bottom of the STOXX, down more than 5 per cent after selling a 22 per cent stake in publisher Penguin Random House. Analysts were concerned about what this would mean for future dividends.

Analysts at Liberum, which has a "sell" rating on the restructuring education publisher, were sceptical about the details of the deal.

Marks & Spencer reported a rise in full-price sales, but its shares fell 4.7 per cent, partly on the back of underwhelming food sales.

Broker notes spurred some of the biggest individual moves, with semiconductor maker AMS a top gainer after Credit Suisse upped its target price.

Peer STMicro - a supplier to tech giant Apple - received a boost after JP Morgan raised it to "overweight", though it ended the session 0.4 per cent lower. "We believe that the market is too cautious on STMicro,"wrote European tech analyst Sandeep Deshpande.

Deshpande also said Apple suppliers would have a strong second half, calling the market too sceptical and predicting the semiconductor stocks would meet or beat expectations.

In the incipient European earnings season, a strong update from Danish insurer Tryg pushed it up 3.6 per cent to a two-year high. Berenberg analyst Iain Pearce said a special dividend could be expected at year-end.

Randstad and Adecco both fell more than 2 per cent, targeted by Deutsche Bank in a note on staffing firms.

Analysts at Deutsche cut ratings for the world's two largest staffing companies, saying current employment levels in the United States and Europe were associated with peaking 12-month investor returns.

British recruitment firm Hays followed its European peers down 1.6 per cent.

REUTERS