Market Report: Aviva surplus helps it buck the market

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The Footsie suffered a bruising decline last night but Aviva bucked the trend and traded higher after HSBC abandoned its negative stance, moving the stock to "neutral" and highlighting the improvement in the insurer's solvency position.

The broker said Aviva's management had "made significant progress in allaying fears" about the company's solvency, with its insurance groups directive (IGD) surplus – a regulatory measure of surplus capital – rising to £3.2bn at the end of June from £2.5bn at the end of March.

The figure is likely to improve further, once the sale of the group's Australian business is completed, while the volatility of the surplus "should fall following the partial listing of Delta Lloyd", HSBC said. Moreover, in light of recent strength in the equity markets, it highlighted the fact that the surplus was less sensitive to further market falls than to gains. A 40 per cent fall in equities, for example, would reduce the surplus by £300m, while a 40 per cent rise would boost the figure by £700m, HSBC calculated.

The assessment proved well timed and helped the stock to avoid a fall on a day when the vast majority of blue chips turned lower. Aviva ended 1.6 per cent, or 6p, higher at 377.8p.

Overall, the benchmark FTSE 100 index closed 1.5 per cent, or 68.96, points lower at 4,645.01, while the mid-cap FTSE 250 index fell nearly 3 per cent, or 241.74 points, to 8,274.09.

The market took a kicking, with traders selling out following heavy losses in Chinese equities, which turned lower amid fears that the recent raft of economic "green shoots" might prove short-lived. Friday's disappointing data about US consumer confidence dominated early trading, overshadowing news that Japan had climbed out of recession in the second quarter of the year and sending the Footsie to a session low of 4,610.34.

David Jones, chief market strategist at the spread-betting company IG Index, said the session was a "rude awakening to the fragility that still surrounds the recovery in stock markets". "It would probably take a slide back below the 4,500-point mark on the Footsie to really inject some fear into traders and prompt more widespread sustained selling," he added.

Traders said recent problems as Colonial Bank, one of Florida's largest banks, also undermined the mood because it underlined the fact that, despite broadly positive interim earnings, the financial sector remained fragile. The waning appetite for risk bore down on UK-listed banks, with Barclays falling 3.4 per cent, or 12.05p, to 347.05p, Royal Bank of Scotland down 2.7 per cent, or 1.26p, to 44.89p, and Lloyds slipping by 4.5 per cent, or 4.5p, to 95p. HSBC fell almost 2 per cent, or 12p, at 638p and Standard Chartered lost 2.6 per cent, or 36p, at 1361p.

Worries about demand affected commodity prices, which relaxed and bore down on the mining sector. Anglo American was hardest hit, easing back more than 5 per cent, or 107p, to 1820.5p, while Rio Tinto declined 4.7 per cent, or 110.5p, to 2245.5p and Antofagasta fell 4.3 per cent, or 31.5p, to 711p. Oil-related stocks were also unsettled, with majors such as BG falling to 1003p, down 1.1 per cent or 11p, and BP easing by almost 1 per cent, or 4.9p, to 500.6p.

Further afield, the commerical real estate rally came to halt amid a round of profit-taking. The sector, which was buoyed by a string of rumours indicating the possibility of a bid for British Land, fell back. Liberty International lost 3.1 per cent, or 15.3p, to 472.4p and Hammerson declined 3.3 per cent, or 13.2p, to 390.9p. British Land fell to 496.2p, down 16.3p or 3.2 per cent.

The latest housing market report from Rightmove, which revealed that average asking prices had fallen back in recent weeks, undermined sentiment around the FTSE 250's housing stocks, with Redrow falling 1.7 per cent, or 3.3p, to 196.3p and Bovis Homes declining 5.2 per cent, or 27.5p, to 500p.

The news also bore on Barratt Developments, which was also the focus of speculation about a possible rights issue following reports in the weekend press that said that it might seek to raise as much as £500m when it unveils its full-year results next month.

Panmure Gordon said such a move was a prospect and pointed out that while Barratt – which closed 5.7 per cent, or 13.7p, weaker at 226.4p – had made good progress in paying down its debt over the past 18 months, its estimates suggested that tangible net gearing was likely to stand at 86 per cent at the end of the year.

"In our view, housebuilders are now at a crucial stage in terms of debt management, with a number of housebuilders (including Barratt) indicating that they will start new sites and may look to re-enter the land market," the broker said. "We continue to believe Barratt will need to undertake a dilutive fundraising in order to secure its debt position and give it a foothold to start growing again."

Elsewhere, Paypoint fell 4.4 per cent, or 22.2p, to 487.8p after UBS switched its stance on the stock from "buy" to "neutral". "The valuation looks full relative to cheaper stocks in the sector and we believe there are limited prospects of a re-rating of the shares," the broker said, scaling back its target price from 650p to 530p.