The markets rallied last night but Diageo failed to make any headway amid worries about the outlook for the FTSE 100-listed drinks giant.
The stock fell by 5p to 1,105p, against a 1.4 per cent rise for the blue chips as a whole, after JP Morgan Cazenove said that while it was not anticipating any ugly surprises with the company's full-year results next week, it did think that Diageo's guidance for the year ahead "could disappoint".
Despite market hopes, the broker reckons that Diageo is unlikely to glide above "mid single digit" growth in organic earnings before interest and tax (Ebit). In fact, given the lack of visibility on the road ahead, JP Morgan warned that Diageo could guide to "low to mid single digit" growth, highlighting headwinds such as the prospect of further deterioration across Europe and the lack of pricing power in North America.
Though the company will benefit from the lack of one-off corporate costs incurred in the first half of 2010, the broker sees forecasts above its estimate of 5 per cent organic Ebit growth in 2011 as optimistic. "It should be remembered that, even in the booming economic conditions of 2003-7, Diageo only grew organic Ebit in the 7 to 9 per cent range," the broker said. It repeated its "neutral" view, with a revised 1,050p target price, compared to 1,100p previously.
Overall, the mining sector underpinned the FTSE 100's 74.45 point rise to 5,350.55, while the FTSE 250, reassured by in-line inflation figures, gained 137.62 points to 9,911.85.
Higher metals prices drove the likes of Lonmin, which closed up 88p at 1,582p, and Xstrata, which rose 45.5p to 1,059.5p. In the wider sector, Kazakhmys gained 43p to 1,219p after Bank of America-Merrill Lynch switched its view on the stock from "underperform" to "neutral".
Vedanta Resources, which recently confirmed plans to buy a majority stake in the Cairn India oil business, was also strong, adding 67p to 2,220p despite some cautious comment from the credit ratings agencies. Fitch lowered its ratings to reflect the size of the deal, while Moody's said it was reviewing the miner's ratings for a possible downgrade. Standard & Poor's also highlighted the possibility of a near term downgrade, placing Vedanta on "credit watch" with negative implications. On the upside, the stock was supported by Merrill, which moved the miner to "buy".
Aviva, which recently confirmed that it had rebuffed RSA Insurance's approach for its general insurance businesses in the UK, Ireland and Canada, gained 19.4p to 397.3p amid talk of bid interest from its French peer, Axa. Other insurers were also firm, with RSA up 0.9p at 125.4p, Standard Life adding 3.2p to 213.6p, and Legal & General gaining 2.05p to 93.25p. Prudential, whose ratings were affirmed and removed from "creditwatch" negative by Standard & Poor's, was the strongest, pulling ahead of Aviva with a 28.5p rise to 583.5p.
The banks were riding high amid talk of short covering. Standard Chartered was the strongest of the lot, adding 58.5p to 1,773.5p, while Barclays swung to 327.1p, up 8.8p, and HSBC gained 13.2p to close at 667.7p.
Royal Bank of Scotland was 1.33p ahead at 47.25p and its state-backed peer Lloyds closed at 70.69p, up 1.28p, despite some words of caution on the part of Morgan Stanley.
British Airways strengthened after BAA and the Unite union reached an agreement to prevent a threatened walkout by ground staff at major UK airports, including Heathrow and Stansted. The airline was 5p ahead at 221.2p as investors heaved a sigh of relief. Elsewhere, defensives had little luck, with United Utilities, for instance, closing unchanged at 590.5p and Severn Trent ending just 1p higher at 1,325p as traders switched into riskier investments.
Further afield, the oil services group Hunting gained 22p to 583.5p on the back of the recent acquisition of the US electronics business Innova-Extel for $125m (£80m). RBS analysts said the deal was "significantly earnings enhancing", and should boost this year's earnings before interest, tax, deprecation and amortisation by 8 per cent. Earnings per share are also slated to rise, with RBS anticipating a 5 per cent uplift for 2010.
The engineering group Spectris which makes precision instruments and controls, was aided by Jefferies. Returning from one of its industry conferences, the broker said there was reason to think that investors could be greeted with a positive surprise when the company issues its half-yearly figures next week. "Although there were occasional exceptions, most of the feedback from the companies attending our conference was neutral to reassuring," Jefferies said, upping Spectris, which gained 8.5p to 891.5p, to "hold" from "underperform".
"There may be hesitations along the path – as there will always be – but the direction of travel seems clear and our earlier pessimism of the timing and rating of a general recovery in industrial investment (especially to the extent that it might affect Spectris) now seem to have been overdone," the broker added.
It revised its target for the company's shares to 820p from 750p.