Market Report: Investment banking hopes boost Barclays

Hopes of higher investment banking profits underpinned gains in Barclays as the FTSE 100 index turned positive last night.

The shares rallied by 8.85p to 357.45p after Morgan Stanley, raising its target for the stock to 440p, said the group's Barclays Capital arm could beat market hopes, with profits swelling on a lower than guided cost to net income ratio. The group is forecast to post £9.7bn in pre-tax profits in 2011 – and, if BarCap can meet Morgan Stanley's estimates of a ratio of 56 per cent, against guidance of between 65 to 75 per cent, it could end up generating 72 per cent, or £7bn, of the total.

Drawing on a report published with Oliver Wyman, a consultancy, the broker forecast a modest 10 to 15 per cent dip in revenues across the investment banking industry this year from extraordinary gains seen last year. Factoring that in, BarCap's top line income falls only 12 per cent year on year in 2010, and then recovers by 5 per cent in 2011, "leaving Barclays well positioned given its scale and growth ambitions", the broker explained.

In the wider sector, Royal Bank of Scotland was marked up by another 0.55p to 43.28p on the back of reports that it was working on a debt buyback programme. "Investors may see this as [a] mild positive," the Seymour Pierce banking analyst Bruce Packard said, adding: "We are sceptical about revenue expectations, particularly in investment banking, given that the banking sector is currency being subsidised by government intervention."

Further afield, Lloyds Banking Group was marginally lower at 57.5p, down 0.07p, while Standard Chartered rose by 19.5p to 1751p and HSBC managed a gain of 2.5p to 683.5p.

On a more speculative track, Arriva, up 12p at 579.5p, was the focus of bid talk, with early rumours highlighting the possibility of a 700p per share proposal for the transport group. The chatter comes after Arriva ended early stage talks with SNCF, the French state railway group, over a possible equity tie-up with its Keolis unit. Last night's rumours did not identify the suitor, though some pointed to the possibility of interest from a continental rival. Germany's Deutsche Bahn was floated as a potential bidder, but traders remained uncertain.

Overall, the FTSE 100 managed to move back above the 5600-point mark, rising by 26.58 points to 5620.43, while the FTSE 250 added 51.03 points to 9930.04 amid thin volumes. The miners, which proved a drag at the beginning of the week, drove the gains, with traders buying in on recent weakness. As a result, the Eurasian Natural Resources Corporation, which was among the hardest hit on Monday, rose by 33p to 1166p, while Antofagasta was 20p higher at 1021p. Lonmin was also firm, adding 16p to 1981p, while Xstrata rose by 8p to 1165p, Fresnillo gained 6p to 826p and Randgold Resources closed at 5000p, up 122p.

Traders, when not tuned into the Cheltenham Festival, were busy passing around the latest missive from Albert Edwards, the widely followed and famously bearish Société Générale strategist. Pointing to last week's Flow of Funds report from the US Federal Reserve, which "showed that US total credit continued to disappear down the plughole", Mr Edwards set off dealing-room debates by saying that "the current recovery, based in very large part on the end of destocking, simply cannot be sustained while credit is disappearing at this dehydrating rate".

Back with the day's movements, and the buying in the financial and mining sectors left the defensives ripe for the bears, with the likes of the pharma GlaxoSmithKline, down 9p at 1239p, the consumer goods giant Reckitt Benckiser, down 27p at 3504p, and the power generation group International Power, down 1.3p at 327.2p, falling behind. United Utilities, Severn Trent and Drax, the owner and operator of the Drax coal-fired power plant, were also under pressure last night, losing 3p to 554.5p, 4p to 1196p and 3.8p to 377.5p respectively.

Elsewhere, the aeroplane parts supplier Meggitt received a boost from UBS, gaining 8.6p to 297.6p after the broker said that on its estimates, consensus hopes for 2010 to 2012 were around 6 to 7 per cent too low. "As air traffic demand improves, we believe Meggitt will continue to re-rate to historical valuation levels, likely aided by consensus upgrades as [aviation] aftermarket growth improves," UBS said, reiterating its "buy" and revising its target price to 340p, compared to 325p previously. "Over the next five years, we expect Meggitt to grow earnings per share at an average rate of around 10 per cent per annum."

On the downside, HSBC dampened sentiment around JD Wetherspoon, the pubs group, which fell to 519p, down 6.5p, after the broker switched its stance to "underweight" from "neutral" on valuation grounds. Though pleased with the recent news on bank refinancing, which it said provides balance sheet headroom for Wetherspoon to reinstate dividends, the broker said the stock was the most expensive in the pubs sector. Seymour Pierce was also negative on valuation, repeating its "sell" view, albeit with a higher 450p target price. The broker said the "the share price appears to be up with events".

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