Hopes of recovery boosted the construction materials company Wolseley last night as the FTSE 100, dragged down by a sell-off in the mining sector, veered sharply lower.
Wolseley's stock rose by 21p to 1447p after Goldman Sachs said the group, which embarked on a cost-cutting programme last year, was well placed to strengthen in the months ahead. The belt-tightening measures have already begun to feed into Wolseley's profits, with further evidence anticipated with its half-year results in March, when the chief executive, Ian Meakins, is expected to deliver a detailed strategic update.
Housing data from Europe and the US is forecast to improve on the back of sustained GDP growth and positive momentum in leading indicators such as consumer confidence.
Taken together, the benefits of cost-cutting and the improving economic picture should underpin gains for Wolseley, whose share price remains well off its highs.
Yesterday, Goldman promoted the stock to its widely followed "conviction buy" list, saying: "We believe Wolseley is at an inflection point where the improving forward indicators for the housing and construction markets, combined with the ongoing tight cost management actions undertaken during the downturn, could translate a natural cyclical leverage into a high level of operational gearing."
Overall, the FTSE 100 ended deep in the red, falling by 39.36 points to 5,498.71 amid heavy losses in the mining sector. The FTSE 250 was also hit, declining by 1.3 per cent or 122.97 points to 9,603.47. Traders pinned the sell-off on fresh signs of tighter monetary policy in China, where authorities raised the proportion of deposits that banks must hold in reserve. The half a percentage point increase in the reserve requirement, the first adjustment since December 2008, rattled traders, many of whom had not expected a change so early in the year. Unsettled by the move, and by disappointing results from the US aluminium giant Alcoa, they rushed to lock in profits across the mining companies.
Fresnillo, which fell 44p to 808p, was among the weakest, while Lonmin lost 88p to 2069p and Kazakhmys slipped 57p to 1435p. Lonmin and Kazakhmys were held back despite support from Deutsche Bank, which moved both stocks from "sell" to "hold" in a wide-ranging sector round-up.
Eurasian Natural Resources Corporation, which Deutsche named as one of its key picks in the sector, was also under pressure last night, declining by 19p to 991p. "It is trading at a significant discount to its net present value," the broker said. "Given its strong balance sheet position, we believe it will ultimately trade at a premium."
In the wider sector, Vedanta Resources was downgraded from "buy" to "hold" by Deutsche Bank, and fell 89p to 2745p as a result. "Vedanta's 'best in class' growth potential in India is well known in the market. The company's good track record for delivering most growth projects on time and on budget is also well established," the broker said. "However, despite our significant commodity price forecast upgrades over the next two years, we estimate that most of the growth and metals price upside is being factored in to the share price already."
Elsewhere, WPP was 6p weaker at 610p after Morgan Stanley weighed in, raising its target price for the stock from 458p to 529p, but sticking to its "underweight" stance.
"Having re-rated despite poor trading in 2009, we expect WPP to underperform due to anaemic top line growth and its testing valuation," the broker said in a sector round-up. The FTSE 250-listed Aegis was also unsettled, easing by 0.6p to 118.5p, despite being raised from "equal weight" to "overweight" in the same review.
On the upside, parts of the commercial property sector were in favour, with Land Securities strengthening by 10.5p to 693.5p after it was upgraded from "neutral" to "buy" at Bank of America-Merrill Lynch.
Hammerson also managed to remain in positive territory, rising by 0.4p to 400.4p, as its target price was raised from 458p to 496p.
Bank of America-Merrill Lynch said that of the major UK property groups, Land Securities was its preferred play on the recovery in the London office market. "We think the London office market will be first to recover heading into the next cycle, and with 45 per cent of its portfolio exposed to the office market, Land Securities will be the best-positioned UK major to benefit from any recovery," Merrill explained.
Further afield, Taylor Wimpey and Barratt Developments were in focus after Royal Bank of Scotland said that, of the riskier plays among the housebuilders, they looked appealing because of their valuations and their scope for debt reduction. Taylor Wimpey dropped 0.43p to close at 42.3p and Barratt shed 2.6p to finish on 136.1p.
RBS added: "Of the less risky, we prefer Persimmon due to the pace of its net debt reduction and estimated margin restoration, and Berkeley due to its relative trading strength, cash opportunities and long-term land bank value." At the close, Persimmon was 4.4p behind at 478.7p, while Berkeley eased back 7.5p to finish at 860.5p.