Market Report: L&G buoyed by backing on capital position

A vote of confidence in its capital position helped Legal & General buck the market trend and bank gains of more than 5 per cent last night.

The insurer climbed to 66p, up 3.2p, after the Royal Bank of Scotland said that the company was in a strong position despite the recent weakness in equity markets.

Analyst Youssef Ziai said: "L&G's excess solvency capital was £2.9bn at the end of September, and a 30 per cent drop in equities from that point will reduce this figure to £2bn, according to the company." With the FTSE 100 down about 15 per cent since the end of September, Mr Ziai said L&G remained "very well capitalised". "The shares are trading at a 41 per cent discount to our estimated enterprise value for the end of 2008 and offer long-term value," he added.

Overall, the FTSE 100 lost 18.56 points to 4,152.69 while the FTSE 250 slipped 1.95 points to 5,831.04. Mining stocks did their best to support the benchmark index after China slashed interest rates in a bid to stave off a slowdown in growth with Vedanta Resources climbing to third place on the Footsie, up 8.64 per cent, or 44p, at 553p, and Kazakhmys, at fourth place, gaining 8.19 per cent, or 18.25p, to 241p.

The gains in the sector helped offset the impact of some grim economic data. In the UK, the Office for National Statistics confirmed that the economy shrank by 0.5 per cent in the third quarter while in the US, disappointing new home sales, consumer spending and durable goods data illustrated the gloom across the Atlantic.

The statistics weighed on the banking sector and HBOS lost 6.7 per cent, or 6.5p, to 90.5p. Standard Chartered fell to 784.5p, down 6.61 per cent, or 55.5p, and Barclays was down 4.19 per cent or 7p at 160p.

Elsewhere, uninspiring results from United Utilities, down 4.04 per cent, or 26p, at 618p, impacted National Grid, which traded lower to 645p, down 4.3 per cent, or 29p.

Nomura issued a bearish circular on J Sainsbury, the supermarket group that ended down 2.19 per cent, or 6.5p, at 290p. Initiating coverage with a "reduce" rating and a 220p target price, the broker told clients that the company's near-term strategic flexibility was limited by a lack of free cashflow, a credit rating "teetering close to the boundaries" and a brand that "represents an increasingly struggling Middle England".

Taylor Wimpey was among the strongest on the FTSE 250 index, gaining 31.36 per cent, or 1.38p, to 5.78p amid continued speculation that the housebuilder was nearing a deal on its debt obligations with lenders. Taylor was said to be considering a debt for equity swap, where lenders take a stake or assume warrants to buy shares at a later date in return for a relaxation of the company's banking covenants.

While the any agreement is likely to be completed at a discount to the current share price, market sources said investors were relieved by the prospect of a resolution. Without a reprieve from lenders, the housebuilder is on track to breach covenants due to be tested in January.

Other companies with high debt levels were sold and the food producer Premier Foods, trading ex-dividend, fell to 19p, down 17.39 per cent, or 4p, and Johnston Press, whose target price was reduced to 8p at Panmure Gordon, lost 10.24 per cent, or 0.81p, to 7.1p.

Parts of the retail sector were unsettled by the woes besieging Woolworths, the troubled high-street chain that went into administration after the market closed last night.

Credit Suisse analyst Assad Malic said the resulting stock clearance could put some short-term pressure on the likes of Home Retail Group, which was down 1p at 184p.

"Woolworths transacts about £1bn in sales through its high-street stores [over the second half] which could easily translate to about £500m over the key October-January months," he said.

"A stock clearance exercise over what is already a weak trading period given demand conditions could therefore exert additional short-term sales and margin pressure on the likes of Argos (owned by the Home Retail Group), Tesco and HMV while presenting a medium-term opportunity for market share gains."

HMV shrugged off the concerns, rising 9.66 per cent, or 10p, to 113.55p after Deutsche Bank issued a "buy" note. Tesco, on the other hand, was down 3.65 per cent, or 11p, at 290.4p.

Among smaller companies, Pixel Interactive Media slumped to 12p, down 33.33 per cent, or 6p, after the advertising sales business issued a profit warning. Citing the pressure on gross margins in the Chinese market, Pixel said pre-tax profits will fall short of market expectations.

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