Market Update: Prudential strongest as FTSE 100 rises
Monday 20 October 2008
The FTSE 100 was up 84.07 points at 4147.08 while the FTSE 250 was down 11.25 points at 6299.58 at 12:18 pm.
Prudential was the strongest on the FTSE 100, up 13.8 per cent or 37.25p at 307.25p, amid speculation that it was gearing up to acquire the Asian assets of AIG, the troubled American insurance giant, for up to $15bn. The talk suggested that sovereign investment funds might provide the Pru with up to £1.2bn for the acquisition in return for a 15-20 per cent stake.
The rumours offset concerns about Prudential's capital position -traders said that, if true, the speculation suggests that the insurer does not need to tap shareholders to shore up its balance sheet. Traders added that there was also some optimism ahead of new business figures, which are due tomorrow.
Sceptics remained unconvinced, however. While Prudential must be keen to acquire the AIG's Asian arm, it will find it hard to fund the deal, they said.
"Pru's market capitalisation is now just £6.6bn after last week's falls," said Cazenove,
"This would imply that a £1.2bn injection would acquire 15 per cent at current prices. It would also leave the group to find another £7.4bn of funding. An unlikely prospect in current markets."
Oil issues, including BP, up 25.75p at 457.5p, Cairn Energy, up 63p at 1472p, and Royal Dutch Shell, up 80p at 1482p, dominated the FTSE 100 leader board as investors bought ahead of a meeting of OPEC, which is pegged to announce a cut in oil production.
"OPEC has called an extraordinary meeting for October 24 to discuss the impact of the financial crisis on oil markets. The oil price has fallen by 40% in the past two months and is now back to levels last seen in [the first half of 2007]," said Goldman Sachs,
"We [have] updated our required oil price curve for OPEC nations to balance budgets going forward and find that on average OPEC requires almost $60 [per barrel] in 2009. This gives them the biggest cost advantage vs. the non-OPEC producers that we have seen over the past 20 years and is likely to give OPEC stronger control on the oil market than in the past."
RSA Insurance was the weakest on the FTSE 100, down 7.75 per cent or 9.3p at 110.7p, after Cazenove revised its estimates for the stock.
"Given continued capital markets volatility, we have marked to market our estimates for RSA. We are decreasing our 2008 earnings estimate by 12 per cent, though this is understandably on the back of lower realised/unrealised investment gains; we are leaving our 2009 and 2010 estimates unchanged for the moment," the broker said, adding:
"We are also marking to market the reported book value, which we estimate has decreased by 8 per cent since 30 June 2008, with the negative impact driven by the adverse movements in equity markets. The on balance sheet equities mark is based on the company's equity hedging disclosure as at the first half stage, where there was protection for UK equities down to a FTSE 100 level of 4,500."
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