Market Update: FTSE 10.7 points behind

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The Independent Online

The FTSE 100 was 10.7 points behind at 3519 while the FTSE 250 fell to 5846.3, down 89 points, at around 11:44 am.

The benchmark index fell back after an abortive move up in early trading, with concerns about the capital strength of leading insurers still weighing on sentiment. Fears resurfaced after Aviva, down 9.5 per cent or 18.1p at 171.8p, posted full year results yesterday – the life insurer opted to maintain its dividend, prompting questions about the prudence of the move as equity markets continue to falter and worries mount about the prospect of higher than expected corporate bond defaults.



Characterising Aviva’s results as the “straw that broke the camel’s back”, Merrill Lynch said: “Pent up fear and fingers hanging over the sell buttons coupled with, in our view, a poorly presented and lacklustre set of results proved to be a lethal combination”.



The broker’s counterparts at Bernstein also weighed in, arguing that the sell off was overdone.

“We would argue that the current price levels are extremely tough to justify, as Aviva’s (and the sector’s) solvency position is actually relatively robust under most likely scenarios, particularly given its ability to flex [the number based on the EU’s Insurance Group’s Directive]. A bearish stance on Aviva and the sector as a whole is justified if you believe that the current bond spreads of 450 basis points on investment grade bonds are anything like a reasonable guide to the likely average annual losses over the next decade. We are more positive, as we do not believe that anything approaching 30 per cent of investment grade corporates will default in the next five years,” Bernstein said,



“In the 2002-3 crisis, the fear about UK insurers was centred on the equity exposure in their With Profits funds, effectively huge ‘put options’ that could have squashed shareholders flat. This time around the With Profits funds look far stronger, and fear has moved on to the insurers’ bond exposure in their shareholder funded books, given their 4-13 times leverage to debt assets and the huge rise in corporate bond spreads in the last few quarters.”



The assessment failed to clam the nerves, with Friends Provident, slumping to 53.2p, down 12.3p cent or 7.5p and Legal & General losing 4.8 per cent or 1.3p to 25.3p.



Moving up



Lloyds Banking Group rebounded, gaining 5.2 per cent or 2.1p to 42.4p amid hopes of a deal on the lender’s participation in the Government’s asset protection scheme. Traders said if Lloyds can hammer out a favourable price for insuring its problem assets, the shares were likely to rally strongly despite the prospect of further shareholder dilution.



Moving down



BT was under pressure, losing 6.7 per cent or 5.6p to 77.8p, after Morgan Stanley suggested the telecoms group, which has been haunted by problems at its Global Services division, may cut back on its dividend as pension problems mount.



“With pension assets of around £30bn, and market capitalisation of £7bn, BT’s sector relative and absolute performance will be driven more than ever by market direction, in our view. But while upside from cost cutting in Global Services could be substantial longer term, the shares still look vulnerable on a shorter term view – free cash flow to equity (post £500 per annum of pension top-ups for 15 years) remains at a 20 per cent premium to the sector, while a faster pay down of the deficit would dilute cash flow further and risk the company’s final dividend,” the broker said, downgrading the stock to “under-weight” from “equal weight”.

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