Market Report: Bullish broker helps Lloyds strengthen

Banks were in focus last night, with Lloyds rising to 69.3p, up 3.7 per cent, or 2.5p, after a broker weighed in with a bullish assessment of the sector's prospects.

Redburn Partners said shares in the three UK-focused banks – Lloyds, Royal Bank of Scotland, which edged up by 0.2p to 38.1p, and Barclays, which eased slightly to 277p, down 1.75p – were ripe for the picking as current valuations were pricing in "a very bearish scenario, which includes five years of global deflation and poor capital markets operating conditions".

Its own "base case" scenario, on the other hand, suggests the three are cheap, with possible of upsides of about 50 per cent for RBS, about 70 per cent for Lloyds and, following the sale of Barclays Global Investors, about 90 per cent for Barclays.

"The upside still averages 25 per cent in an inflationary scenario. Even the most dangerous deflationary scenario is priced in," the broker said, adding that its analysis underlined two things, namely "that the economics of UK banks remain attractive in all but the most dismal of economic outcomes, and how little credence the market currently gives to this counter-intuitive outcome".

Overall, the market was unmoved by the day's activity, with the FTSE 100 rising slightly to 4328.57, up 2.56 points, and the FTSE 250 relaxing to 7483.6, down 9.92 points.

The telecoms group BT was the strongest of the blue-chips, rising by 8 per cent, or 7.6p, to 102.5p, thanks chiefly to Morgan Stanley, which switched its stance on the stock to "overweight" from "equal-weight", with a revised 150p target price, compared to 130p previously. Traders were also focusing on announcements relating to Lord Carter's Digital Britain report, the details of which began emerging less than an hour before the close.

Elsewhere, Man, the London-based hedge fund group, rose to 286.25p, up 4.3 per cent, or 11.7p, after its chief executive Peter Clarke was reported to have signalled that the company may sell its stake in MF Global, the brokerage formerly known as Man Financial. "We're not a strategic long-term holder [of MF Global]," he was quoted as saying at the GAIM hedge fund industry conference in Monaco. In other news, Jefferies International raised its target price for Man's shares to 247p from 232p.

BAE Systems was 2 per cent, or 6.5p, stronger at 327.5p, following a successful investor meeting at the Paris Air Show on the night before. UBS, which reiterated its "buy" stance yesterday, said the company appeared confident, adding: "BAE said that despite investors' defence budget fears it had good visibility on the first three years of its five-year plan and that its expectations for its outer years have been going up."

British Land was a penny firmer at 393p after Société Générale weighed in, upgrading the stock to "buy" from "sell". JP Morgan also switched its stance, moving British Land to "overweight" from "neutral".

Also on the upside, the services group Serco was 2 per cent, or 8p, stronger at 403.75p after UBS moved the stock to "buy". "We acknowledge that the current environment must be positive for Serco," the broker said.

"Given the budgetary constraints the public sector faces, those companies that can reduce costs (such as Serco) for the public have a greater opportunity in this environment to win business," added UBS. "Furthermore, Serco is well placed given its position and reputation in the UK and a number of contracts have been announced in the first half."

On the downside, parts of the mining sector remained weak, with Anglo American easing to 1,679p, down 14p, and Rio Tinto losing 2.5 per cent, or 71p, to 2,829p after saying that its trading outlook for the remainder of the year remained uncertain.

On the second tier, the house builder Redrow, which was 1.25p firmer at 191.25p, was in focus, after Goldman Sachs switched its stance to its "conviction sell" list in a new sector review.

"The May 2009 house price increase is not the start of a new upward trend in our view," the broker said. "We continue to forecast a second quarter 2010 trough to coincide with peak unemployment and no meaningful recovery in the 12 months thereafter."

On a more positive note, Goldman added that the near-term stabilisation in prices will nonetheless "have a moderating impact on house builder land write downs for the period ending June 2009".

The broker was keener on Bovis, down 5.75p at 382.75p, which was moved to "buy" from "neutral" in the same review. "On our estimates, the current share price implies further inventory writedowns of 19 per cent, similar to Barratt (22 per cent) and Taylor Wimpey (21 per cent) despite the company having significantly lower financial leverage," Goldman said. At close, Barratt Developments was 5.75p lighter at 160.25p, while Taylor Wimpey lost 1.5p to 33.5p.

Among smaller companies, Braemore Resources was almost 13 per cent, or 0.57p, heavier at 5p after confirming preliminary offer talks with a third party.