Market Report: L&G under pressure amid FTSE 100 sell-off

Legal & General fell back as the the wider market veered sharply lower last night declining by more than 7 per cent after Citigroup turned negative.

The broker scaled back its recommendation on the stock to "sell", albeit with a revised 71p target price, compared to 56p previously, in a life insurance sector round-up, saying that the company's turnaround strategy faced challenges. In particular, a focus on low margin savings products could prove risky.

"We believe that the current turnaround strategy being fashioned around selling low margin selling savings products is risky given that the competitive advantage of a life insurer over an asset manager on these products is very limited, apart from the ability to sell guaranteed products," the broker explained. "Also, with an infrastructure built to write annuities, the company will have to shrink its cost base to make this business profitable."

Citi was more positive on Prudential, which was upped to "buy" in the same review. "Prudential's recent rally removes the significant valuation discount though the price is still yet to recognise fully the potential for the franchise to outperform in the long run," the broker said. Citi highlighted the company's growth prospects, adding: "Its relative competitive position has strengthened in the US due to the... dislocation in the market while it continues to increase its market share in Asia."

The assessment contributed to L&G's decline to 78.5p, down 7.4 per cent, or 6.25p. Prudential, although better off, was also in the red, closing at 620.5p, down 4.6 per cent, or 30p as the wider market suffered its worst session since the end of March.

Overall, the benchmark FTSE 100 index slumped by 3.2 per cent, or 170.68 points, to 5194.13 and the mid-cap FTSE 250 index retreated to 8880.52, down 3.2 per cent, or 290.24 points. The slide was provoked by concern over turmoil in the Middle East, with investors selling amid worries of a default by the Dubai government, which earlier asked creditors to two of its largest corporate entities for a debt standstill agreement.

To compound investors' woes, technical difficulties at the London Stock Exchange interrupted trading for several hours. "As far as glitches go, the London Stock Exchange couldn't have picked a worse day," said Manoj Ladwa, senior trader at ETX Capital. "Traders were sat at their desks twiddling their thumbs for three hours while the LSE sorted out their issues... Once trading did resume on the main bourse, [they] continued dumping stocks."

The banking sector was among the hardest hit, with the Royal Bank of Scotland declining by 7.8 per cent, or 2.77p, to 32.995p and Barclays retreating by 8 per cent, or 25.2p, to 291.1p. The sell-off came amid a swirl of rumours linking different European banks to parts of the troubled emirate. Besides RBS and Barclays, Lloyds was 5.42p weaker at 88.83p, HSBC fell to 705.6p, down 35.6p, and Standard Chartered lost 93p to 1514p.

Elsewhere, in the mining sector, worries about Dubai were supplemented by news that copper inventories at warehouses monitored by the London Metals Exchange had risen to their highest level in months. A late rebound in the US dollar also pressured the sector, with Xstrata falling to 1022p, down 6.8 per cent, or 75p, and Kazakhmys retreating by 6.4 per cent, or 83p, to 1213p.

Commercial property stocks were out of favour amid fears that Dubai's debt problems may lead to a fire sale of the emirate's real estate assets in the UK. There were also worries about the future of capital flows, with Nomura analyst Mike Prew saying: "The tangible impact is a potential reduction in capital flows into the UK commercial real estate market from Middle Eastern states which are less resources rich than others."

As a results, Land Securities declined by 3.9 per cent, or 26.5p, to 660.5p as the fears offset the impact of some support from Credit Suisse, which upped its target price for the stock to 707p from 544p. British Land was 17.5p weaker at 450p, and Hammerson fell by 12.9p to 399.5p. Liberty International was also weak, declining by 3 per cent, or 14.4p, to 473.1p.

Water companies managed to buck the trend, gaining ground after Ofwat, the water market regulator, held back from deep reductions in household bills in a decision on prices. Credit Suisse said it regarded Ofwat's release "as a small but reassuring improvement on the draft determination". "Much of the fears on dividend sustainability have already been priced in, in our view," the broker said, as Severn Trent, up 3.8 per cent, or 38p, at 1044p, swung to pole position on the FTSE 100, and United Utilities rose to 485.8p, up 1.7p.

Back on the downside, and the London Stock Exchange fell to 754.5p, down 60p. The stock was hit both by the interruption to trading and by concerns about the stake held by Borse Dubai, its largest shareholder.

Traders moved out amid concerns that the Middle Eastern investor, which is backed by the Dubai government, may be forced to sell down its stake as the emirate grapples with its debt.