Market update - 12 March

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The Independent Online

The FTSE 100 was 47 points behind at 3646.7 while the FTSE 250 eased below the 6000-point mark, losing 73.6 points to 5953 at around 11.55am this morning.

Life insurance group Aviva was the weakest on the benchmark index, retreating to 181.1p, down more than 15 per cent or 32.4p after Citigroup weighed in with a bearish note.



Moving the stock to “sell” with a 160p target from “hold” with a 450p target, the broker said the company looked risky, with “some of the most extreme asset leverage in the sector”.



“The group has reserved as best as it can for corporate bond and mortgage loan defaults but there still remain concerns – particularly within the hybrid component of the corporate bond portfolio and given the high loan-to-values in the loan books,” the broker said,

“Outside of this, the group has material exposures to equities and real estate (inclusive of the pension fund) and, particularly within its Dutch and US business, could have some significant guarantee issues if risk free rates come over 100 basis points lower.”



Citi went on to say that, given the level of asset leverage, the company’s solvency position looked “thin”, adding:



“Aviva has the lowest coverage ratio in the European sector and there is a material deficit on our S&P capital adequacy simulation model, calibrated to an ‘A’ rating. We are not wholly convinced that there is significant flexibility to boost solvency should markets deteriorate further.”



Echoing concerns first voiced after Aviva posted full year results last week, Citi questioned the decision to maintain the 2008 dividend.



“In our view, if the dividend policy is maintained, the balance sheet will not regenerate from future operating earnings. This leaves it in the hands of markets: already equities have fallen materially and real estate values are still dropping. If markets recover, Aviva’s solvency should be able to cope. But further market falls would increase the pressure.”



Moving up

There was little notable activity on the upside. Satellite group Inmarsat, up 2.9 per cent or 12.5p at 442.5p, and supermarket chain Morrisons, up 1.6 per cent or 4p at 249.75p, strengthened as investors welcomed their results.



Moving down

Antofagasta lost over 7 per cent or 39.5p to 496p after Royal Bank of Scotland switched its stance on the stock to “sell” from “hold”.

“We believe Antofagasta remains one of the best positioned miners to weather the economic storm in the coming quarters ahead, with a $3bn net cash position. However, despite the strength of the balance sheet, we still think that [the company] holds much the same P&L risk in 2009 as its peers,” the broker said.

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