Man, the London-based hedge fund group, advanced by 13 per cent last night, after Citigroup, the broker which sparked concerns about the company's dependence on its flagship AHL fund, said the market was discounting more than its own worst-case scenario.
The stock has suffered in recent months, declining in value as investors, spooked by the severity of the financial crisis, began to question the outlook for hedge fund-of-funds. Citi was among those who questioned Man's business model, arguing back in November that its dependence on AHL meant that the group was "flying on one engine". Not only that, but with AHL's performance "notoriously volatile", the group was increasingly vulnerable to fluctuations in the fund's performance, the broker said at the time.
Those concerns and others about the pressure on margins and negative cash flows remain intact, Citi argued last night, but said that at current levels "this uncertainty is priced in".
"We estimate a fair value of 158p just for AHL," said the broker, saying that, after adding 56p for surplus capital and 17 for the final dividend forecast, its estimates, factoring in no value for the group's RMF and Glenwood funds, were well above recent levels.
The assessment was accompanied by a round of bargain-hunting in UK-listed financials, which took Man to 175.8p, up 13 per cent, or 20.3p.
Overall, the FTSE 100, up 4.8 per cent, or 172.8 points, at 3,715.2, drew steam from the strength in financials, and short covering in the wider market. The FTSE 250 was also strong, gaining 3.2 per cent, or 185 points, to 5,954.8.
Gains were attributed to a speech by the US Federal Reserve's chairman Ben Bernanke, who called for global action to overhaul the financial system, and late rumours that the Bank of England will use its asset purchase powers to buy back certain gilts at "any price" in an attempt to lower Libor, the rate at which banks lend to each other in the money markets.
Traders said that, if true, a targeted lowering of Libor would go a long way in unclogging the gummed-up money markets, which have been a key point of concern in recent months.
News that Citigroup had had a strong start to the year also lifted spirits. Citi's chief executive, Vikram Pandit, made the disclosure in an internal email, sparking a rally on Wall Street, where traders and analysts heaved a collective sigh of relief. There was also cheer at talk of a possible reimposition of the SEC's so-called uptick rule, which only allows stocks to be sold short when the last sale price was higher than the previous price.
Back in London, Barclays, which was moved to "outperform" at Credit Suisse, was among the biggest beneficiaries of the shift in sentiment, jumping by almost 10 per cent, or 6.1p, to 67.5p. The broker said the stock offered relative value in the banking sector, adding "we think there's a reasonable chance it will use the Government asset protection scheme and think there are options available to raise capital".
HSBC was the strongest lender, recovering by 14.3 per cent, or 50p, to 399p. Royal Bank of Scotland was 10.5 per cent, or 2p, ahead at 21p.
Insurers also made the most of the market rally, with Prudential advancing by 21 per cent, or 43.5p, to 250.5p and Friends Provident, which said talks regarding a possible deal with F&C Asset Management had ended, gaining 20.6 per cent, or 11.3p, to 66.1p. Legal & General was 16 per cent, or 3.7p, ahead at 26.7p.
The gold producer Randgold Resources missed out on the recovery, losing 8.1 per cent, or 279p, to 3,150p as investors regained their appetite for risk.
The company tends to benefit in periods of increased turmoil, as investors seek to increase their exposure to gold. But it is liable to underperform as market participants grow more confident. The price of gold moves in a similar pattern, and last night fell below $900 per ounce for the first time in a month.
Other miners were more fortunate, with Kazakhmys climbing to 301p, up 38p, and Rio Tinto jumping by 203p to 1,985p amid talk of short sellers aban-doning downside bets in the sector.
Elsewhere, Brixton, the commercial property group which is expected to be booted out of the FTSE 250 in tonight's index review, continued to underperform, losing 15.4 per cent, or 2.75p, to 15p.
The results of the review will be announced after the close tonight. Yell, the directories group which was flat at 15.5p, and Punch Taverns, the pubs group which was 3.8 per cent, or 1.25p, ahead at 34p, are among the others that are considered likely to be demoted from the FTSE 250.
The Lloyd's of London underwriter Brit Insurance was 7.8 per cent, or 13.75p, stronger at 188.75p after Keefe, Bruyette & Woods moved the stock to "outperform" from "market perform".
Among smaller companies, the infrastructure group Hill & Smith was 5.7 per cent, or 8.5p, behind at 140p after posting a cautious outlook with its final results. Although it stands to benefit from the various government economic stimulus measures in the US and elsewhere, the company said it was mindful of the uncertainty attached to the ensuing downturn.Reuse content