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FTSE falls as rate rise hints hit housebuilders but Arm gains ground

Leading shares have dipped lower, with housebuilders weighing on the index after Bank of England governor Mark Carney suggested interest rates could rise soon.

The sector has had a bumpy ride over the past week or so, since the budget proposed tightening up the buy to let market. Dearer borrowing costs is another negative, helping push Taylor Wimpey 2.1p lower to 188.8p and Barratt Developments down 6p to 638p.

But the biggest loser in the leading index is Marks & Spencer, down 6.5p at 539.5p after news that head of general merchandise John Dixon was to leave the retailer.Analyst Tony Shiret at BESI Research kept his buy rating on the shares but said the news of Dixon’s departure was likely to focus attention on succession planning:

One of the interesting aspects of this story is that it now seems more widely accepted among the press that current chief executive Marc Bolland will leave the company in the foreseeable future whether it succeeds or not in the coming Autumn/Winter clothing season. This story had limited currency until recently suggesting a degree of positioning from within M&S. Clearly a bio-style piece on Head of Retail (and online) Laura Wade-Geary a few months ago suggested that she was being positioned (initially) as Bolland’s successor.

From an investment perspective management change tends to presage a period of introspection by the new person followed by statement of their position/intentions going forward. This means uncertainty and strategic hiatus. Against this the market will try to work out for itself whether the new person is likely to provide new momentum and address any perceived issues affecting company delivery/prospects. In the case of M&S it is possible that succession will come against the backdrop of successful delivery against the current strategy and that there is felt to be less need for a change of strategy to accompany the change of person.

The question of chief executive succession at M&S is not easy. There are currently a number of potential insider contenders but in our opinion they are all unlikely to be able to do the job. For some it is a question of possibly not being good enough and for some they do not have the full skill-set and would most likely benefit from extended mentoring, maybe by a temporary chief executive if Marc Bolland leaves.

Overall the FTSE 100 is down 25.35 points at 6771.10, despite the Greek situation seemingly slightly calmer. Germany is set to vote on the bailout proposals but its parliament is widely expected to pass the deal, albeit with some opposition.

Bucking the downward trend is Arm, up 11p to £10.29 ahead of its forthcoming figures. Analyst Julian Yates at Investec raised his recommendation, saying:

We move back to buy from hold ahead of the first half 2015 results, due 22 July. The stock has underperformed the market by 12% in the last three months, and is at a near 25% discount as well as the bottom of its five-year valuation range. We foresee no material surprises at the results and expect numbers to be in line. We see this as an attractive entry point into the stock, which has a compelling investment case based on the significant historic licence signings underpinning future royalty growth.

Among the mid-caps B&M European has added 8.9p to 348.9p after an upbeat trading statement with the discount retailer saying it expected to at least meet full year expectations.

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But Restaurant Group has fallen 18p to 669p after Nomura cut its rating from buy to neutral to reflect the impact of the living wage announced in the budget. It said:

The cumulative impact of a 3% minimum wage increase in October and a 7.5% increase in April adds an unprecedented margin headwind in the pub/restaurant sector, we believe. High operational and financial gearing mean estimate sensitivity is high and we lower estimates across the board.

[For Restaurant Group] 8% annual estate growth and the strength of its brands should continue to drive growth but the PE of 19.5 times now looks stretched relative to an earnings per share compound annual growth rate of 7%.

On Aim, Africa-focussed support services group Atlas Development has slumped 52% to 0.95p after it warned second half revenues would be significantly below expectations. It blamed a downturn in the oil sector with the fall in crude prices, with contracts being delayed or cancelled. It said the decline in the sector would not be as short-lived as expected.


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