Market Report: Earnings prospects drive Admiral higher

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Insurance issues were in focus last night, with Admiral leading the way as traders bought in amid hopes of a recovery in earnings.

Bank of America-Merrill Lynch said that if 2009 was the year of the balance sheet, with insurers scrambling to strengthen their capital positions, then 2010 promises to be the year of earnings, as results put upward pressure on estimates. Though the recovery in earnings has already started, it is difficult to spot because of the frequency of results, because many insurers report only every six months. For those that do post numbers every quarter, the picture has been muddied by the number of exceptional items that showed up in last year's results, the broker explained, anticipating more clarity in the year ahead.

"The financial market recovery has led to a significant easing of balance sheet and capital adequacy worries. In other words, we have moved into the next stage of the recovery phase and earnings momentum should be a major theme for 2010," BofA-Merrill said. The third stage – the recovery in sales – has been patchy so far, and is not likely to come through clearly until the second half of this year at the earliest, it added, citing the impact of macroeconomic factors.

"Sales recovery will not take place in a meaningful way until the economic recovery takes a firmer hold, and this is particularly true in western Europe and the US," BofA-Merrill said. "Indicators such as consumer confidence and unemployment will need to improve markedly and consistently before long-term savings rates start to pick up in our opinion."

Admiral led the sector, gaining 25p to close at 1163p as the broker upped its target for the stock from 1150p to 1200p, while the FTSE 250-listed St James's Place was 1.2p firmer at 270p after Merrill switched its stance to "buy". Others were held back as the FTSE 100 continued to slide, with Old Mutual easing by 1.2p to 110p, Prudential slipping 5.5p to 624p and Legal & General closing broadly unchanged at 82.95p, a rise of 0.05p. RSA Insurance was 1.2p ahead at 127.7p.

Overall, the FTSE 100 fell by 25.23 points to 5,473.48 while the FTSE 250 lost 33.95 points to ,9569.52.

The mining sector continued to underperform amid concerns about China's moves to tighten monetary policy. Randgold Resources, for instance, fell 145p to 5035p as traders banked profits from their recent gains. Vedanta Resources was 25p weaker at 2720p despite some support from analusts at Morgan Stanley, who raised their target price for the stock from 3168p to 3838p.

Parts of the banking sector buckled after Société Générale issued a profits warning. The French lender also said it expected to make a further €1.4bn writedown on risky assets. The news depressed British lenders such as HSBC, which fell 10.7p to 717.7p, and Barclays, which closed 2.9p lower at 313.7p. Standard Chartered was also held back, easing by 4p to 1546p, but Lloyds and Royal Bank of Scotland managed to close in positive territory, firming up by 0.03p to 56p and by 0.82p to 35.6p, respectively.

Elsewhere, Royal Dutch Shell came under pressure amid rumours that the oil company might be guiding analysts to lower their fourth-quarter earnings forecasts. Its shares duly fell 33.5p to 1862.5p. Traders played down the chatter, however, blaming it on the read-across from Chevron, the US oil giant which recently said its fourth-quarter results would be lower than in the previous three months. They also pointed to the fact that the stock had been downgraded from "equal weight" to "underweight" by Morgan Stanley. Shell declined to comment.

In the wider sector, BG was also unsettled, easing back by 6p to 1229p despite some supportive comment from Collins Stewart, which reiterated its "buy" stance ahead of the company's February strategy presentation. "We expect the presentation to address some of the key concerns which affected the stock in 2009, with confirmation of a solid outlook for its liquefied natural gas division and a reiteration of its exploration and production growth targets," the broker said, raising its target price for the stock from 1250p to 1375p.

Further afield, Cazenove boosted the plastic and fibre products supplier Filtrona, which gained 8.3p to close at 196.6p after the broker raised its stance to "outperform". "Filtrona's positioning as a niche manufacturer means that it is well positioned to benefit from a general recovery in manufacturing activity across the globe," Cazenove said. It also upgraded its estimates for Filtrona to reflect a more positive outlook for 2010.

On the downside, Dana Petroleum was 18p weaker at 1254p after Deutsche Bank moved the stock from "buy" to "hold" in an oil and gas exploration and production round-up.

Premier Oil, which is rated "buy" at Deutsche, was also weak, retreating by 20p to 1190p. "With a string of exploration disappointments at the end of the 2009 full year, Dana's shares, like Premier's, have fallen to a discount to core net asset value," the broker said. "However, although Dana's production business is more oil-focused, it is far more fragmented, and has a strong element of decline."