Market Report: Vedanta soars on Morgan Stanley's zinc outlook

Morgan Stanley is convinced zinc prices will rocket in the new year and the US broker tipped Vedanta Resources as the major winner on the London market from such a scenario. Such talk sent Vedanta 54.5p higher to 835p as investors clamoured over one another to buy into the company.

Research from Morgan Stanley concluded that zinc prices need to rise much more if enough supply is to be made available to meet Chinese demand for the commodity. The market is greatly underestimating the higher long-run prices required for zinc, according to the broker, which has raised its long-run price forecast for the metal by 23 per cent. "We see zinc as having the greatest upside potential in 2006-07 among the base metals," Morgan Stanley said.

It pointed out that Vedanta is a significant winner from higher prices as the mining group generates nearly half its earnings from the commodity. Despite the fact that shares in the group have more than doubled over the past year, Morgan Stanley believes they have much further to go. The US broker set a 1,100p price target on the stock and argued that other brokers will soon have to raise their earnings forecasts significantly for Vedanta.

In the broker's own words: "Zinc is under-analysed in the UK stock market and we think Vedanta shareholders will be well positioned to benefit from several waves of earnings upgrades as the market plays catch-up."

Elsewhere in the sector, Lonmin fell 48p to 1,592p as UBS sold 4.9 million shares at 1,593p on behalf of an institutional client.

The retail sector was also a major talking point after better-than-expected high street sales figures from the Office for National Statistics. After the data was announced, Kingfisher climbed 5p to 234p, Matalan added 0.75p to 177p, MFI Furniture improved 0.75p to 77.25p,French Connection gained 5.25p to 275p and JJB Sports added 2p to 175p.

Deutsche Bank was upbeat about the sector in the run-up to the new year. The broker said: "We expect Christmas to be satisfactory, relative to modest expectations." It urged investors to buy into Signet, up 0.75p to 107.25p, Next, 9p higher at 1,532p, and HMV, 5.75p stronger at 184.5p, before Christmas. But it said it fears 2006 will be tough with only a gradual recovery in retail sales. Deutsche named GUS, 10p higher to 1,002p, as its favoured UK general retailer for the year ahead.

Kesa Electricals missed out on the gains seen elsewhere in the sector, falling 4p to 257.25p, after JP Morgan downgraded the stock to "underweight" from "neutral". It warned that trading conditions are difficult for the electricals retailer in France, which has experienced falling sales of white goods for every month since May. The broker said: "Kesa's trading statement on 19 January is likely to make grim reading so there is little potential for any good news ahead of full-year results on 22 March."

Cable & Wireless rose 1.25p to 118.75p amid vague rumours of a bid for the group from Telecom Italia. Dealers said the speculation had started in the derivatives market which saw solid demand for C&W's March call options. These contracts allow the owner to cash in on a sudden rise by the stock - such as that seen after a bid approach - through a minimal outlay of cash. But analysts suggested Telecom Italia is unlikely to be interested in C&W. They also pointed out that C&W is regularly tipped for takeover, with France Telecom usually touted as the buyer, and that not once has even a tentative bid emerged for the company.

The FTSE 100 dropped 25.8 points to 5,495.3 as the falls across the heavyweight oil sector took its toll on the blue-chip index. Royal Dutch Shell dropped 30p to 1,843p, BP gave up 6p to 624p and BG Group fell 3p to 549p.

Lower down the pecking order, Umbro rose 6.25p to 151.25p on news the sportswear maker had extended its sales and distribution deal with the Football Association. Doughty Hanson, the private equity backer of the group, used the share price strength as an opportunity to sell down its stake. It disposed of 20 million shares at 150p through JP Morgan Cazenove. This leaves it with a 19 per cent holding of 28 million shares.

Premier Research ticked 1.5p higher to 108.5p on whispers the group's recent acquisitions are doing well. ITE Group, 5.5p higher at 127p, saw Edward Strachan, a executive director at the exhibitions organiser, sell 3.3 million shares at 120p. Morgan Sindall added 45p to 916p after the construction group boasted its full -ear results would be at the top end of expectations.

Finally, Portrait Software ticked 0.5p higher to 21.5p as John O'Connell, the chairman, bought 235,000 shares at 21p, taking his total holding to 635,000.