Market Report: Inventory worries hit chip maker ARM

ARM Holdings, the mid-cap chip manufacturer, was under pressure last night amid concerns that, following a period of rapid restocking across the semiconductors sector, inventories were now rising to levels that could render the industry vulnerable to a correction in the supply chain.

Bank of America Merrill Lynch said its global industry model suggested that inventories were now modestly above market equilibrium levels. Historically, this has been a good signal to reduce exposure to the sector, as the longer this state of affairs persists, the greater the risk of a correction. Indeed, barring a sharp upturn in the world economy, the broker said its indicators "point to the potential for an inventory correction, thus rendering the [risk/reward balance] associated with the ownership of chip stocks unattractive".

"A move higher above equilibrium, within the context of largely unchanged GDP forecasts, would only delay the inevitable correction in the supply chain," Merrill explained. "Conversely, the second scenario, ie a move lower from current levels, would imply a more imminent correction, but a shallower one." The assessment drove traders out of ARM, which was also downgraded to "underperform" from "neutral" by the broker, and at the close the stock was almost 7 per cent or 11.5p weaker at 156p.

Overall, the FTSE 100 veered sharply lower, declining by 1.4 per cent or 74.43 points to 5267.7. The FTSE 250 was also weak, losing 2.1 per cent or 194.15 points to 9236.9. Equities fell back as traders banked profits on the view that the recent rally had run its course and was now adequately pricing in the prospects of a recovery in corporate earnings. Early weakness on Wall Street, where leading stocks fell back amid a similar dash from risk, hastened the decline in London.

The weakness did little to dampen the enthusiasm in some quarters, with Anthony Grech, market strategist at the City spread-betting firm IG Index, saying that there was scope for a rebound in coming sessions. "It would not be surprising, once the dust has settled after [last night], for the buyers to come back in over the next couple of days and for the UK index to once again move back towards the 14-month highs set earlier this week," he said.

The mining sector, so often the driver of gains on the FTSE 100, proved the biggest drag last night as the commodities rally stalled in the face of strength in the US dollar. Antofagasta was among the weakest, declining by 5.4 per cent or 50.5p to 890.5p, while Fresnillo lost 48.5p to 871.5p. Xstrata was just over 5 per cent or 57p weaker at 1070p, and Kazakhmys lost 54p to 1273p. Rio Tinto was 3.8 per cent or 126p behind at 3184p.

The sell-off was almost all encompassing, with only a handful of blue chips managing to record gains last night. Reckitt Benckiser, up 35p at 3140p, was among the risers, as analysts weighed in on overnight rumours of deal activity, with Colgate Palmolive, the world's largest toothpaste maker, being mentioned as a potential merger partner. There was also talk of a takeover, with the FTSE 250-listed condom maker SSL International, up 10p at 676.5p, being mooted as a potential target for Reckitt.

For British Land, the waning appetite for risk offset the impact of some words of support from Morgan Stanley, which switched its stance on the commercial property group's stock to "overweight", with a revised 480p target price, compared to 370p previously. The shares nonetheless traded down by 8.5p to 486.7p.

Segro, down 8.7p at 366.3p, and Land Securities, down 12p at 701p, were similarly unsettled despite positive comment from the broker, which said that while British property sector stocks look fairly valued, investors could be "set for a period of volatility with potential strong share price performance short-term followed by a sell-off later in 2010".

Retailers suffered the same fate, with the likes of Kingfisher, down 1.9p at 241.8p, and Next, down 10p at 2006p, declining despite the release of official figures evidencing strong growth in UK retail sales in October. Debenhams, down 4.1 per cent or 3.6p at 83.65p, and DSG International, down 3.2 per cent or 1.21p at 36.33p, were also held back last night.

Elsewhere, Morgan Stanley's words proved more potent around Hikma Pharmaceuticals, which rose by nearly 2 per cent or 9.5p to 506.5p after the broker upped its stance on the stock to "overweight", citing the prospects for revenue growth at the company. "We see scope for surprise in the strength of US generics [in the] short term and in a higher dividend payout as cash flow improves," the broker said, revising its target price for the stock to 600p from 467p.

The support services group Connaught was 3.9p ahead at 396.9p, thanks to Panmure Gordon, which moved the stock to "buy" from "hold". Mears, which is also rated "buy" at Panmure, was broadly unchanged, easing by 0.75p to 276.25p. "We believe that these two companies have strong growth potential and deserve to be valued at a premium to the market," the broker said, adding that the two should trade on multiples of 16.5 times and 13.3 times forecast earnings for 2010.