By Helen Reid
LONDON (Reuters) - British shares could not shake a downbeat mood on Friday and suffered their biggest weekly drop in two months as retail stocks continued to weigh, with Burberry and Bunzl (LON:BNZL) leading losses.
FTSE 100 was down 0.7 percent, sliding for the second day alongside broad weakness in European trading. It ended the week with its heaviest loss in two months.
Industrials and construction stocks piled pressure on the index, tracking a slide in these sectors across Europe. They have been among the strongest drivers of stock market gains in the past months.
Bunzl dropped 6.3 percent, the weakest-performing large-cap stock, after a note from Morgan Stanley (NYSE:MS) said the retail distributor's shares were not yet reflecting potential disruption from Amazon (NASDAQ:AMZN) Business, the online giant's business-to-business distribution venture.
"Amazon's intention to target B2B distribution has resulted in a significant derating for Rexel, whilst Bunzl has been unaffected. However, the Bunzl offer appears more vulnerable to us," MS analysts said, recommending investors switch into the French distributor's shares.
Retailers weighed on the index for a second day after a week of downbeat results from Marks & Spencer and Sainsbury's confirmed investors' widespread pessimism on the sector.
A survey showed British shops suffered their worst October for sales in a decade, sending M&S and Primark owner ABF down 1.5 to 1.8 percent.
"The leading data suggests to us that demand will be weaker over the next 6 to 12 months," said Edward Park, investment director at Brooks Macdonald.
"We have already seen this in Q3 earnings for domestically focussed companies and CEO guidance for future quarters has been less optimistic."
Burberry sank for a second day, extending Thursday's sharp results-driven losses, after no fewer than five brokers cut their price target on the stock.
Belgian billionaire Albert Frere's decision to hike his stake in the trench coat maker from 4 to 6 percent wasn't enough to provide relief for the stock.
Energy providers Centrica (LON:CNA) and SSE (LON:SSE), which have been under pressure due to the government's plan to cap prices on energy, fell 1.6 to 2.4 percent.
Among mid-caps Ultra Electronics shares sank 11.1 percent after the defence contractor said it expected a delayed decision from the U.S. Department of Justice on its $234 million purchase of Sparton Corp.
Rival defence contractors Babcock and Cobham (LON:COB) also sank 0.9 to 2.1 percent, while outsourcers Capita and Serco dropped 2.6 percent each.
Morgan Stanley said the outperformance of FTSE small-caps - up 35 percent since the Brexit vote - could fade, as analysts grow more pessimistic, with earnings revisions for the index recently hitting an 18-month low.
"We are starting to see an acceleration in the number of UK companies talking more cautiously about the impact of Brexit," analysts at the U.S. bank added.