Market Report: Fear of price freeze dulls energy shares

The plug was pulled out from energy shares yesterday after the market decided comments from Labour leader Ed Miliband could be disastrous for the utilities sector.

Mr Miliband said on Tuesday that if Labour is elected, he will instigate a 20-month price freeze for power and gas bills. The market took half a day to digest the threat before they cut the power on energy providers Centrica, SSE, National Grid and Drax.

Punters are concerned dividends will be hit as a result of the bill freeze, which would eat into profits at the big six energy suppliers. Analysts at Morgan Stanley warned that although the threats are at an early stage, they "raise the political risk profile of the energy supply sector", would lead to the UK becoming the next "tariff deficit" and could "materially reduce energy supply profit".

Morgan Stanley also said that even if the policies are not enacted, risks have increased because the Labour Party has shown that it is keen to rein in industry profits. It added: "If it does return to government, this would not bode well for investors."

Investors making a swift exit hit Centrica, down 21.1p to 375.6p, and SSE, the former Scottish and Southern Energy, down 91p to 1,489p, the worst. National Grid weakened 9p to 737.5p and Drax tumbled 9.5p to 683.5p.

Liberum Capital said Centrica should "accelerate its already announced move" to step up its investment outside the UK while the energy companies "should also consider a legal challenge to Labour's proposal as on the face of it is hard to reconcile price caps with the EU energy liberalisation directives".

Across the wider market, traders failed to find any reason to buy as concerns about the eventual reduction of quantitative easing in the US still weighed. The FTSE 100 index declined 19.93 points to 6,551.53. Bargain-hunters piled in to miner Fresnillo after its recent fall, and it was top of the benchmark index, 35p brighter at 1,006p.

City analysts lined up to tell investors to abandon ship at Carnival. Analysts at Morgan Stanley, Exane BNP Paribas and Natixis all issued the equivalent of sell ratings after the cruise-ships operator reported a 30 per cent fall in third-quarter profit. Its shares tumbled 5.6 per cent on Tuesday and lost another 6.7 per cent yesterday.

Punters agreed with the brokers' advice and it sank 152p to 2,106p.

The engineer Amec decided that, after five years, it was a good time for some broker housekeeping. It has ditched Deutsche Bank and replaced it with Barclays to join Bank of America Merrill Lynch. Amec was 2p better at 1,093p.

Analysts at UBS raised their price target for aerospace group BAE Systems to 490p after new contract wins for the group earlier in the week, and it was 10.4p up at 461.3p.

Oil group Soco International reported good results from a drill test and its spurted up 1.1p to 430p. On the small-cap index, pubs group Punch Taverns, which is still in talks to sort out its debt situation, reported a 23 per cent full-year pre-tax profit slump to £49m but was unmoved at 15p.

The fashion and homeware retailer Laura Ashley disappointed investors with falling comparable sales, and it lost 2.25p to 24p. Meanwhile, the Russia-focused gold miner Petropavlovsk also welcomed some bargain-hunters and shone 4.5p brighter at 76p.

On AIM, iodine maker Iofina jumped 37p to 185p after reporting record half-year sales. The group extracts iodine out of waste brine from shale oil and gas fields in the US and South America, and investors were hoping its purple patch will continue. Investec's scribblers said it "remains a high-potential, but high-risk, investment".

Panmure Gordon's analysts declared Animalcare, which sells medicines for pets, is a "mini Dechra at the start of journey". Panmure was likening the group to the mid-tier listed Dechra Pharmaceuticals as it started covering it with a buy.

It said it "allows investors access to large and fast-growing markets which are relatively predictable and without much economic cycle volatility". But traders have yet to heed Panmure's advice and it was unmoved at 172.5p.

Fuel technology specialist Oxford Catalysts has been renamed Velocys, and was 5p stronger at 164.5p.

Security and defence surveillance technology specialist Digital Barriers secured a 9p gain to 149p after winning two new contracts.