Market Report: Hays strengthens amid recovery hopes

Hopes of a re-rating in cyclical stocks strengthened Hays, the mid-cap staffing group which last night closed at its highest level since the summer.

Goldman Sachs triggered the optimism, telling clients that as the market, emboldened by the recent slew of better-than-expected economic indicators and aggressive government action, switches focus from the current weak economic conditions to the prospects of future growth, cyclical stocks, which have been held back in recent months as traders began to price in the slump, should begin to recover.

"History shows [that] once stabilisation occurs following a bear market, the market rallies on average 50 per cent in the first year," the broker said, "Assuming the lows of March mark the bottom, there is further upside potential, given that the market [has] rallied 25 per cent since then."

In the staffing sector, Goldman picked Hays, which gained 6.6 per cent or 6p to 97.25p, as a key recovery play, as its stock has been "beaten up on cyclical concerns".

"While labour markets remain extremely challenging, the pace of deterioration in lead indicators is abating and we expect staffing stocks to continue to re-rate towards average multiples," the broker added, moving Hays, which has underperformed its peers owing to cyclical concerns, to "buy" from "neutral".

Overall, the market continued to rally, with the FTSE 100 gaining 2.2 per cent or 93.72 points to 4,336.94, and the FTSE 250 rising to 7,836.83, up 3.5 per cent or 265.5 points.

The mining sector dominated the benchmark index, with traders buying into leading stocks on hopes of an uptick in China's demand for commodities. Vedanta Resources, up 11.5 per cent or 130p at 1,260p, was the biggest beneficiary of the buying spree, while the Eurasian Natural Resources Corporation climbed to 676p, up 9 per cent or 56p.

Elsewhere, the banks rallied on the bank of a strong first-quarter update from Standard Chartered, which gained 8.5 per cent or 90p to 1,150p.

The update served to bolster views of a recovery in the sector's fortunes, driving Royal Bank of Scotland, which will publish a trading statement later this week, to 48p, up 9.1 per cent or 4p, and Lloyds Banking Group to 121.1p, up 10.5p per cent or 11.5p.

Barclays, which will update the market on Thursday, was also strong, rising to 298p, up 6.8 per cent or 19p, but behind its peers after Panmure Gordon highlighted the possibility of another capital raising.

"We also still see both earnings and capital risks at Barclays, largely coming from an expected rise in corporate default rates," the broker said.

"Besides rising impairment charges on the loan book, we also expect some more esoteric sources of increased losses [such as possible losses on collateralised loan obligations]."

The improvement in the appetite for risk left defensive stocks languishing on the FTSE 100 loser board, with British American Tobacco easing to 1,583p, down 1.5 per cent or 24p.

GlaxoSmithKline, which drew strength from the swine flu outbreak last week, was also weak, losing 13p to 1,018p, as investors banked profits. The stock had rallied on news of the outbreak, as investors factored in increased demand for its Relenza anti-viral drug.

British Airways, on the other hand, rose to 165.9p, up 12.1 per cent or 17.9p, as the swine flu fears subsided.

On the second tier, the transport group National Express, up 28.8 per cent or 74.7p at 334.25p, rallied on the back of recent reports suggesting that it was close to agreeing a deal that would allow it to walk away from the troubled East Coast rail franchise, and possibly move to a management contract instead.

Investec said the news was a "major positive" for company, and, if true, was likely to pave the way for "large upgrades", while at the same time "opening the door to a refinancing".

"The cost of withdrawal from the franchise is likely to be relatively light. The performance bond, which will now most likely be forfeited, is relatively small at £31m, and the season ticket bond is minimal given the inter-city nature of the franchise," the broker said. "Drawing a line under the East Coast risk would, however, make an equity raising much more achievable. This may be needed in light of a €540m refinancing requirement in September 2010."

In the housing sector, Taylor Wimpey advanced to 50p, up 13 per cent or 5.75p, after Cazenove moved the stock to "outperform" from "in-line".

The stock was also boosted by Fitch, the ratings agency, which switched its ratings watch stance to "positive" from "negative", citing the recent refinancing announcements, which the agency said had "considerably" reduced the risk of a default.

Among smaller companies, AIM-listed Petra Diamonds rose to 57.75p, up 23.5 per cent or 11p, ahead of the auction next week of a rare 7 carat diamond from the Cullinan mine in South Africa. The flawless blue diamond, which will be auctioned by Sotheby's at the Beau-Rivage Hotel in Geneva, has a pre-sale estimate of between $5.8m and $8.5m.

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