Market Report: Old Mutual undermined by Budget jitters

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Old Mutual traded lower last night, sliding by more than 5 per cent or 3.3p to 56.5p amid concern that the Chancellor may scrap higher-rate tax relief on pension contributions when he unveils the Budget today, which would damage Skandia, the company's savings and investments business.

Analysts at Merrill Lynch said that limiting the tax relief to the basic rate would effectively halve the tax break on new pension contributions for high-rate taxpayers, thereby making pensions less attractive than non-pensions savings products.

"A higher-rate taxpayer currently effectively pays £60 for every £100 invested in a pension plan; this cost could rise to £80 if higher-rate tax relief was scrapped," they said, suggesting that the move would affect the flow of money into the UK pensions industry in favour of more conventional bank and asset management products.

Given Old Mutual's bias, through Skandia, to pensions and higher-rate taxpayers, Merrill said that, along with Standard Life and St James's Place, the FTSE 100-listed insurer was among those most at risk from any changes.

"Aviva, Legal & General and Friends Provident would also be affected, although we suspect these companies have less exposure to higher-rate taxpayers," Merrill added.

The concerns helped to send Standard Life to 178.2p, down 4.7 per cent or 8.7p, while St James's Place lost 3.7 per cent or 6.25p to 160.75p.

Elsewhere, around Aviva, Merrill's comments were overshadowed by HSBC, which reiterated its "underweight" stance on the stock, forecasting a halving of the 2009 dividend as management "seeks to strike a balance between dividends and strengthening its capital buffer".

Aviva was down 7.5 per cent or 20.5p at 253.5p, while Friends Provident, for which HSBC assumes no dividend growth, was 3.6 per cent or 2.4p behind at 63.6p. Legal & General was 3.9 per cent or 1.9p lighter at 47.2p.

Overall, the benchmark index was broadly unchanged, as hefty losses in the insurance and banking sectors were offset by gains among the retailers, with the FTSE 100 easing by 3.4 points to 3,987.4. The FTSE 250 was weaker and slipped below the 4,000-point mark, losing 29.43 to 6,987.25 points.

The grim outlook for bad debts spurred investors to indulge in another round of profit-taking in the banking sector, depressing Lloyds Banking Group to 95p, down 9.1 per cent or 9.5p, and Barclays to 199p, down almost 4.8 per cent or 10p.

BSkyB was unsettled, easing to 429.5p, down 6p, after Morgan Stanley reduced its estimates, moving the stock to "equal weight" from "overweight". The broker said: "We think BSkyB's core business is operationally resilient to cyclical effects, but is less financial resilient."

It added: "At the margin, shortfalls in more vulnerable revenue sources such as advertising, Sky Bet, pubs & clubs and broadband content against a relatively fixed cost base have a negative effect on the bottom line."

Among the miners, Xstrata tumbled by 2.3 per cent or 12p to 512.5p, with traders attributing the fall to softer metals prices and a downgrade by Exane BNP Paribas, which moved the stock to "neutral" from "outperform".

The Eurasian Natural Resources Corporation managed to outperform its peers, bucking the trend in the wider market and climbing by 8.3 per cent or 42p to 550p, while Lonmin rose to 1270p, up 2.5 per cent or 31p.

The upside was dominated by the retail sector, which was buoyed by positive results from Tesco and Associated British Foods, owner of the Primark chain. Tesco, which posted annual revenues of more than £1bn a week, was the second best performing blue chip of the session, climbing to 348.3p, up almost 5 per cent or 16.2p, while AB Foods, whose first-half earnings report was ahead of market expectations, advanced to 686p, up 4.9 per cent or 32p.

Down on the second tier, DSG International lagged behind, losing 5.2 per cent or 1.75p to 32.25p amid vague talk that it was preparing to embark upon a cash call.

Taylor Wimpey, on the other hand, jumped to 49.5p, up 9.4 per cent or 4.25p, after announcing the disposal of its construction business in Ghana, West Africa. Fellow housebuilder Bellway was less fortunate, losing 9.5p to 714.5p, after KBC Peel Hunt advised investors to take profits in the sector.

"The level of housing activity logically should begin to rise as banks offer more mortgage capacity and various government schemes begin to take effect," the broker said. "But for housebuilders, rising volumes with still weak pricing could easily result in rising costs, further pressuring margins."

Among smaller companies, GMO, the wireless services group which lost 40 per cent or 0.5p to 0.75p, became the latest company to announce its intention to delist from the Alternative Investment Market.

Like others, GMO blamed the low levels of liquidity in its stock and the poor performance of its share price, both of which weighed against the "significant costs" incurred in maintaining a listing.