Market Report: BAT climbs back as defensives recover

British American Tobacco traded higher last night, as defensive stocks, depressed by some sharp selling in the session before, staged a recovery.

The cigarette maker was the worst-performing blue chip on Tuesday, as investors bought into riskier cyclical plays. But the trend was reversed last night, with BAT gaining 4.8 per cent or 71p to 1,566p.

Investec said investors faced a conundrum – although BAT remains attractive, and while it has suffered in recent weeks, on a two-year view it has still outperformed cyclical stocks in the financial and mining sectors. "The risk therefore exists that cyclicals continue to rally despite our view that BAT is looking highly attractive," the broker said.

For now, the investors appeared happy to live with the risks. Besides BAT, other defensives, including Reckitt Benckiser, the consumer goods giant, which gained 4.3 per cent or 108p to 2,612p, and Shire, the pharmaceutical group, which added 2.7 per cent or 22p to 825p, also firmed up during the session.

Financial issues fell back as defensives recovered, with investors moving to secure profits in the banking and insurance sectors. As a result, Legal & General, which was among the strongest in the session before, retreated to 50p, down 8.3 per cent or 4.5p. Royal Bank of Scotland, which was reported to be in talks with three banks interested in snapping up its Asian assets, eased to 27.7p, down 5.1 per cent or 1.5p, and Lloyds Banking Group lost 4.3 per cent or 3.8p to 84.1p.

Overall, the FTSE 100 was 20.6 points behind at 3,968.4, while the FTSE 250 fell back towards the 7,000 mark, losing 42.8 points to 7,109.4 amid lacklustre volumes.

Traders remained relatively upbeat, with many highlighting a call by Crispin Odey, the widely followed hedge fund manager, who said the recent upturn in equities may signal the beginning of a new bull market.

Elsewhere, miners were unsettled as investors took profits from the previous session's copper price inspired rally. Vedanta Resources, which was the best-performing blue chip on Tuesday, was among the worst last night, losing 7.5 per cent or 76p to 932p. Xstrata was 6.5 per cent or 40p lower at 573.5p while Kazakhmys retreated to 487.25p, down 5.1 per cent or 26.2p.

The Eurasian Natural Resources Corporation was also weak, losing 3.7 per cent or 20.5p to 533p. The company sidestepped a sharper fall thanks to Citigroup, which told clients to "buy" on any short-term weakness. Setting a 600p target price on the stock, the broker added that ENRC had a promising portfolio of assets, which it could exploit as and when market conditions improve.

On the upside, Tesco gained 1.7 per cent or 5.7p to 329.2p as ING weighed in, predicting a 7.5 per cent increase in underlying pre-tax profits when the company reports full-year results later this month. "These results are important and will enable the market to assess UK margin progression in the context of the ongoing market share erosion of the business in recent quarters (as measured by TNS)," the broker said, adding that the outlook for the UK for the current year was "increasingly challenging". It added: "Although management still retains a long-term 3-4 per cent like-for-like growth target for the UK business as a whole, we do not expect this will prove attainable again in the near term."

Further afield, parts of the pub sector were lifted by a positive update from Marston's, which touched a session high of 174.5p before retreating to 158p, up 1.25p, as investors banked profits. Enterprise Inns, which was initiated with an "equal-weight" rating and a 135p target price at Barclays, was the strongest of the lot, climbing to 125.75p, up 10.5 per cent or 12p. Punch Taverns, which has rallied strongly over recent weeks, supplemented gains, rising to 112.25p, up 4.4 per cent or 4.75p, amid vague speculation regarding a possible bid for its Spirit pubs business.

Mitchells & Butlers failed to rise, however, losing 4.7 per cent or 13.5p to 270.25p after Barclays set an "underweight" rating and a 230p target on the stock. The broker said that although the company's managed pub operation is faring "much better" than peers, "the valuation more than fully reflects its prospects".

Among smaller companies, Afren, the Africa-focused oil and gas prospector, eased by 0.25p after unveiling an £85m share placing to help finance the development of the Ebok field in Nigeria. The company placed 265 million shares with institutions at 32p apiece.