LONDON: Britain's top share index pared early losses to end flat on Tuesday, with uncertainty regarding the outcome of a German court ruling on the euro zone's bailout fund and the US Fed's likely stimulus plans prompting investors to avoid strong bets.
However, analysts said sentiment was improving following some positive steps taken by policymakers in Europe and the FTSE 100 could rise 4-5 percent by the end of 2012.
Investors awaited Wednesday's German court ruling, which will probably reject the temporary injunction request against the European Stability Mechanism (ESM) and Europe's budget discipline pact, legal experts predicted in a Reuters poll, but they expected the court to impose tough conditions.
"Certainly there is going to be some conditionality attached to the ruling, but the market would be very happy to see it ratified. A positive outcome is partly priced in, but there is scope for the FTSE to gain further," Angus Campbell, head of sales at Capital Spreads, said.
"There seems to be a bias towards riskier stocks. If we see more stimulus in the United States than the market is expecting, then we could see a further appetite for risk."
The US Federal Reserve will hold a two-day policy meeting, starting on Sept. 12. Economists in a recent Reuters survey predicting a 60 percent chance of another round of stimulus known as quantitative easing.
The FTSE 100 index ended 1.01 points, or 0.02 percent, lower at 5,792.19 points after falling to a low of 5,764.22 earlier in the session. The index surged 2.1 percent on Thursday and rose 0.3 percent on Friday on the back of the European Central Bank's bond buying plans. It is up 4 percent so far this year.
"We have got some more upside, but think that investors are cautiously positioned at the moment. The best way to play is to focus on sectors such as banks and utilities," Robert Parkes, equity strategist at HSBC Securities, said.
"The global economy is still growing, corporate balance sheets are strong and we don't see a collapse in earnings from here. That puts the spotlight on valuations, which we feel are too low and pricing in too much negative news."
According to Thomson Reuters Datastream, the FTSE 100 index trades on 10.3 times its 12-month forward earnings, against a 10-year average of 12.8. The US S&P 500 index trades on 12.6 times its one-year forward earnings.
MINERS SLIP
Miners suffered heavily on concerns about metals demand in China, the world's top consumer. The UK mining index fell 0.8 percent, Anglo American dropped 2.3 percent and Xstrata fell 1.5 percent.
Vedanta Resources fell 2.4 percent after Goa, a key iron ore producing state in India, temporarily suspended all mining activities. Shares in Sesa Goa Ltd, an Indian unit of Vedanta which gets most of its iron ore from mines based in Goa, fell more than 6 percent.
Charts showed the index faced strong resistance on the upside. Cliff Green, an independent technical analyst, said that 5,990, where the market failed back in March, would prove to be a tough resistance point for the index.
"To generate longer-term uptrends, we do have to break above the 6,100 area decisively and that would be very bullish indeed. But I don't think we are ready for that just yet and will continue to be pretty volatile in both the directions."
Campbell of Capital Spreads and Parkes of HSBC saw the FTSE index closing at 6,000 and 6,050 points respectively by the end of 2012, a rise of between 4 to 5 percent from Tuesday's close.
Among individual movers, Burberry plunged nearly 21 percent after the British luxury brand warned that its full-year profit would be at the lower end of market forecasts, noting store sales slowed in recent weeks.
Seymour Pierce said that the profit warning would hit sentiment towards Burberry and the luxury sector and the shares were likely to underperform until there was better news on demand. It cut it recommendation to 'hold' from 'buy'.
"However, we still consider Burberry a strong long term growth story with significant geographical and product mix opportunities," it said in a note.
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