Market Report: Earnings from investment bank offer Barclays a lift

Barclays was in focus last night amid hopes that investment banking earnings would help it to overcome the headwinds faced by domestic peer Lloyds.

Morgan Stanley said a below par economic recovery, elevated funding costs and likely pressures on net interest margins could lead to Lloyds missing consensus earnings estimates beyond 2010. Barclays was likely to fare better as investment banking earnings drive profits. Unlike Lloyds or Royal Bank of Scotland, it is also expected to pay dividends, the broker said, helping Barclays rise by 10.5p to 301.35p last night.

"Our earnings assumptions [for Lloyds] are 30 per cent below consensus for 2012, based on slower asset repricing, higher funding costs and a more bearish view on the UK economy as austerity measures crimp loan growth and delay impairment normalisation," the broker explained, moving Lloyds, which was 0.57p higher at 54.9p, to "underweight" while keeping Barclays at "overweight".

overall, the FTSE 100 was 38.45 points firmer at 5,202.13, while the FTSE 250 rose by 132.82 points to 9,795.41. The strength was pinned on better than feared economic forecasts from the UK's new Office for Budget Responsibility, and on gains in the mining sector, with leading stocks tracking firmer commodity markets. The Mexican silver producer Fresnillo was the strongest of the blue chips, rallying by 51p to 1,060p, while Kazakhmys rose by 49p to 1,183p and Xstrata gained 33p to 1,033p. In the oil & gas sector, the impact of higher crude prices was offset by another sell-off in BP, which was 9.3 per cent or 36.45p lower at 355.45p last night.

The oil major lost ground amid fears that it may suspend or delay dividend payments in a bid to quell growing political pressure over the Gulf of Mexico spill. Separately, the company issued an update on the spill, revealing that the costs of the clean-up had ballooned to around $1.6bn. In the wider sector, Royal Dutch Shell was broadly unchanged at 1,796.5p, up 4.5p. BG was only slightly higher at 1,106p, up 8p, despite ING analysts saying that oil companies looked cheap.

"The oil sector is cheap on a range of valuation measures – dividend yield, price to book, price to cash flow and the implied equity risk premium," the broker said. "This cheapness is apparent even if BP is removed from the calculations... We would suggest that investors use the BP crisis as an opportunity to modestly increase exposure to oil stocks."

Back on the upside, and the hospitality group Intercontinental Hotels rose by 42p to 1,197p after Citigroup, returning from a two-day investor event in New York, reiterated its "buy" rating. "Although no trading information was given, it is clear that conditions in New York remain very strong," the broker said. "The hotels we saw reported occupancy above 90 per cent and room rates increasing. Although visibility remains low, there is a belief that booking windows will have to increase given the high levels of occupancy."

Insurers received a boost from HSBC, which said the sector's fundamentals "remain sound despite the headwinds". "Despite stronger capital positions, improving balance sheets and limited credit losses, the sector is now back at July 2009 levels after recent macro concerns," the broker said, reiterating its positive view on Legal & General, up 2.1p at 83.15p, and Prudential, up 12.5p at 547.5p.

Elsewhere, Severn Trent was 38p stronger at 1,284p after RBS weighed in on the water sector, highlighting the potential impact of higher inflation. "Severn Trent has the most upside to higher inflation – if we have 5 per cent inflation, rather than the 2 per cent in our model, then we could be looking at a 5 per cent earnings upgrade," the broker said.

RBS also supported sentiment around Wolseley, the construction materials company which was 13p higher at 1,601p after the broker abandoned its "sell" stance. RBS also raised its earnings forecasts, but held back from recommending that investors buy the stock. The broker said that while the cost-cutting benefits and year-on-year restocking trends were helping the group, Wolseley still faced "significant revenue pressures from a continued decline in non-residential construction in the US and Europe that we expect to persist throughout 2010".

further afield, the IT group Logica was 1.7p lower at 121.2p after UBS scaled back its target price for the stock to 134p from 155p, citing the uncertainty caused by prospective cuts to public sector spending in the UK and across parts of Europe, particularly Holland.

"Investor concern is ... rightly focused on the possibility of severe cuts in European public sector spending, along with risks that corporate IT expenditure suffers as corporate confidence is dented by fears over sovereign debt and the deteriorating euro," the broker said, highlighting the fact that in the UK Logica has large contracts with, among others, the Home Office, the Crown Prosecution Service, and the Ministry of Defence. Besides trimming its target, UBS also reduced its earnings estimates for the group, but kept the stock at "neutral".