Deal activity underpinned a firm session on the FTSE 100 yesterday, but Old Mutual fell back amid worries that the recent run of strength in the Anglo-South African insurer's shares may have run its course.
The stock was 2.3p lower at 120.8p, against a 20.95 point rise to 5,266 for the FTSE 100 index, after Goldman Sachs abandoned its "buy" view. Old Mutual's shares have had a good run of late, with investors cheering the sale of its US life business to Harbinger Capital Partners for $350m (£225m). Though "significantly positive", Goldman warned that the deal had been "priced in to the current share price", leaving the valuation vulnerable to the prospect of weakness in the South African economy and the possibility of Government intervention in the country's foreign exchange markets.
"Recently, the ruling national party [the African National Congress] submitted a discussion document considering a tax on capital inflows to achieve a more 'competitive' level for the rand... We believe that such intervention could be detrimental for Old Mutual's [sterling-based] valuation," the broker said, adding that, while solvency levels were less of a concern, it was also "worth noting that a 1 per cent decrease" in the rand-sterling exchange rate would shave £14m off the amount of capital surplus to the statuary solvency requirement for the insurance group.
Beyond that, there was the prospect of continued weakness in the wider South African economy, with Goldman highlighting a recent statement from local lender Nedbank, which is part owned by Old Mutual. "Nedbank issued a relatively cautious outlook, stating that the economic recovery is taking longer than initially expected and the improvement experienced during the earlier part of the year has now softened," the broker added, lowering the stock to "neutral" with a revised 145p target price.
Overall, the blue chips outperformed their mid-cap peers, and the FTSE 250, which is seen as more representative of the UK economy, eased by 66.18 points to 9,788.31 as the FTSE 100 edged higher last night. Deal hopes drove the mood on the senior index, with traders welcoming confirmation of talks between Vedanta Resources, the India-focused miner which was 176p behind at 2,181p, and Cairn Energy, the oil prospector which was 8p higher at 452.8p. Vedanta said it was in discussions over the acquisition of an interest in Cairn's Indian arm, which is listed on the country's Bombay and National stock exchanges.
Gold miners were in favour as the market's appetite for risk remained subdued. Randgold Resources, for instance, was 130p stronger at 5,595p as investors sought to raise their exposure to the yellow metal, the traditional hedge against the threat of slowing growth and rising inflation. In the broader mining sector, a round of bargain hunting on the commodity markets lifted Antofagasta, which was 6p higher at 995.5p, and Xstrata, which was 3p up at 1,007p.
Defensive stocks were also higher as the bulls went into hiding, with the pharmaceutical group GlaxoSmithKline gaining 30.5p at 1,196p, and the cigarette maker Imperial Tobacco rising by 19p to 1,825p, as investors bought in on the back of their counter-cyclical strengths.
The banking sector was broadly higher as bargain hunters offset the impact of worries about a dip back into recession. Barclays lost ground, shedding 4.05p to 309.55p, but Lloyds rose by 0.66p to 70.69 and the Royal Bank of Scotland edged up by 0.41p to 46.41p. HSBC also stood firm, ending the session at 661.3p, up a respectable 3.8p. Standard Chartered was less successful, closing slightly lower at 1,745p, down 3p.
Elsewhere, the retail group Halfords was among the strongest of the mid-caps, gaining 16.7p to 470p as words of support from Credit Suisse weighed against worries about the outlook for consumer demand. The broker raised its target for the stock to 650p from 460p, arguing that management's aim of doubling earnings at Nationwide Autocentres, the recently acquired car servicing and repairs business, was achievable, though it does call for a material hike in sales from the ongoing rebranding exercise.
Further afield, benign broker comment also boosted Ferrexpo, the iron ore pellet producer, which rose by 7.7p to 290p after Goldman advised clients to "buy". Given that the company's expansion projects could more than double production, the broker argued that Ferrexpo's "growth profile should be more generously reflected in the share price". "Evidence of continuing improvement in steel and iron ore markets should also be supportive for the shares," Goldman said, initiating coverage with a 400p target price.
Quercus publishing, the London-based independent publisher which struck gold by backing Stieg Larsson's Millennium Trilogy long before it became a global phenomenon, closed at its highest level since late 2007 on the Plus Market. After rising in the morning, the stock, which has been buoyed by stellar sales of Larsson's novels, pared gains during the early part of the afternoon. A reversal in the final hours of business drove it back to 102.7p, up 21.2p at the close.
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