Market Report: Overseas prospects prompt Glaxo upgrade

Pharma stocks firmed up last night, with GlaxoSmithKline gaining 2.6 per cent or 26.5p to 1,058.5p, after a leading broker turned positive on the sector.

Morgan Stanley, which switched its stance on the sector to "attractive", said current valuations left room for improvement, highlighting four key factors which in its view make pharma stocks ripe for picking.

First, big players are moving to a more diversified business model, encompassing both a broader spread of assets and geographies, which should lead to "better earnings visibility and a more stable growth outlook". The second (related) point is the growth in healthcare investment in emerging markets. A broader geographic base should provide new growth opportunities, the broker said, adding: "From a top-down analysis, we calculate that the Bric countries [Brazil, Russia, India and China] will contribute an incremental $650bn to $700bn in healthcare spend over the next five years."

Third, the impact of the Obama administration's healthcare plans may not be as bad as feared by some in the market. The pricing pressures precipitated by any plan to increase coverage to the ranks of uninsured Americans will be mostly offset by the concomitant rise in volumes, the broker said. And finally, the sector stands to benefit from a more clement US regulatory environment, as various political and legal factors, including the rise of the Democrats and a recent Supreme Court decision to deny federal pre-emption on product liability claims, come together.

The assessment was accompanied by an upgrade for Glaxo, which was moved to "equal-weight" from "underweight". AstraZeneca, which is also rated "equal-weight" at Morgan Stanley, closed at 2517p, up 33p.

Overall, the market was generally quiet, with the FTSE 100 up to 4,461.87, up 25.12 points, and the FTSE 250 firming up by 24.46 points to 7,754.44.

Royal Bank Scotland was strong, rising to 39.7p, up 4.8 per cent or 1.8p, following reports that UKFI, the body responsible for taxpayer-funded stakes in the banking sector, was considering selling exchangeable bonds in RBS and Lloyds, which climbed to 66.7p, up 2.6 per cent or 1.7p, to recover part of the Government's investment in the two groups.

Barclays was 5.6 per cent or 16p stronger at 304.5p, as traders awaited news on the Barclays Global Investors sale. The stock also benefited from buying pressure precipitated by an index change, due to take effect from the start of business this morning, following the recent conversion of certain mandatory convertible notes by the Abu Dhabi royal family's investment vehicle.

Elsewhere, Invensys gained 5.5 per cent or 12.5p to 241.5p after Goldman Sachs moved the technology group's stock to "buy" from "neutral" in a capital goods sector review.

"Leading indicators suggest a stabilisation of the global business cycle, and our economists' 2010 global GDP growth forecasts are above consensus," the broker said. "Historically, turns in global leading indicators have preceded periods of both absolute and relative sector performance."

The engineering and construction group Balfour Beatty was 2.75p stronger at 339.25p, thanks to UBS, which raised its target price for the stock to 380p from 358p after returning from an investor day. "UK contracting is likely to shift from schools and hospitals to power, water and rail," the broker said. "The impact of a potential change in the UK government is a known unknown, with no clear policy goals signalled from the Conservative Party."

British American Tobacco remained firm, rising by 9p to 1,668p after JP Morgan reiterated its positive view on the global tobacco sector, saying: "The robust year-to-date tobacco performance, supported by pricing, reinforces our view that the stocks have upside, with downside limited by average dividend yields [of] over 5 per cent." Both BAT and Imperial Tobacco, which was up 4p at 1,611p, are rated "overweight" at JP Morgan, with respective price targets of 2,250p and 2,200p.

Also on the FTSE 100, the outsourcing group Capita managed to rise by 8p to 740p, despite a downgrade from Panmure Gordon, which switched its stance to "hold" from "buy" on account of valuation.

Further afield, on the second tier, investors moved to bank profits in Candover Investments, which eased to 293.5p, down 3.9 per cent or 12p after confirming it was in exclusive talks on the sale of its equity stake in Wood Mackenzie. Although the company did not name the suitor, recent reports have named Charterhouse Capital Partners as the most likely bidder.

On the upside, the engineering group Cookson was 5.7 per cent or 16p ahead at 296p after Citigroup, which hosted a one-day roadshow for the company earlier this week, reiterated its "buy" rating. "Management indicated that trading remained broadly unchanged vs that indicated with the May interim management statement. This reflects a still tough backdrop as Cookson had made minimal year-to-date profits in May, with [the Ceramics division] especially weak," the broker said. "However, equally, they are not seeing a sudden weakening of demand as has been seen at UK engineering peer Charter."