Market Report: Centrica shares fired by bullish Merrill Lynch

It is almost a year since ill-advised comments from the Russian gas giant Gazprom inadvertently sent shares in Centrica into a takeover frenzy. Since then, the shares have quietly rallied back past their Gazprom peak and closed yesterday half a penny off a new all-time high, 6.5p better at 361.75p.

The US broker Merrill Lynch believes the stock has further to go and upped its recommendation to "buy" from "hold", with a new price target of 390p. The investment bank believes the collapse of wholesale gas prices should mean a sharp improvement in margins for Centrica on top of cost-cutting measures taken by the new senior management team. The broker concedes that despite much of last year's bid speculation being "ill-founded", the fact that there are very few quality independent utility assets left in the UK means that mergers and acquisitions cannot be discounted.

The world's largest quoted hedge fund manager, Man Group, enjoyed a stellar year in 2006, adding almost 60 per cent. The US investment bank Morgan Stanley believes there is more upside left in the stock and yesterday reiterated its "overweight" advice, telling investors the stock still has potential for 30 per cent more upside. The shares closed 9.75p firmer at 531.75p, but were lagged behind another fund manager, Amvescap, which climbed 16.5p to 622p.

In the wider market, London shares were lower again as weak mining and oil stocks dragged the FTSE 100 down by 11.2 to 6,204.5. Index heavyweight BP shed 4.5p to 536.5p as investors digested Tuesday's damning Baker report.

Banking stocks were also short on buyers after Swiss broker UBS downgraded Lloyds TSB and Royal Bank of Scotland. The investment bank told clients that Lloyds is currently trading at a five-year high and that it does not expect any major re-rating of the stock this year, despite what it sees as a more expansive management strategy. UBS cut Lloyds, 6p worse at 584p, to "reduce" and Royal Bank of Scotland, unchanged at 2,032p, to "neutral", also on valuation grounds.

The managed pubs sector has gone from being one of the hottest in the market at the tail end of 2006 to being one of the worst performing sectors in the market so far in 2007. Despite continued takeover speculation, Punch Taverns lost another 38p to 1,159p, while Greene King closed 23p worse at 1,080p. Many analysts are more bearish on the sector thanks to last year's run up, largely based on consolidation and hopes that the sector will convert its property into Real Estate Investment Trusts.

Things are going from bad to worse at HMV Group. Investors are deserting the stock and the shares closed 6p worse to 127.5p, within touching distance of a new four-year low. It is now nearly 12 months since Permira tried to buy HMV for 210p per share, and the private equity giant must be mighty relieved its offer was rejected by the HMV board for being too low. WH Smith, due to update the market on Christmas trading next week, also attracted some selling pressure, shedding 7p to 373.75p.

Aga Foodservice continued to rally, closing 12.5p firmer at 416.5p, as the Dutch investment bank ABN Amro upped its advice on the stock to "add" and increased its target price to 436p from 424p. Perhaps of more interest to traders, the broker said that if the US side of the business does not pick up, then a bid for the company cannot be ruled out.

In the small caps, AIM-listed minnow Maghreb Minerals was the star after more than doubling on news it has won the rights to a zinc-lead mine in Tunisia. The value of the deposit is estimated to be in excess of $1bn at current commodity prices. Given that the company has a market capitalisation of just £7m, even taking into account yesterday's spectacular rally to 14.12p, a rise of 8.37p, there should be plenty of upside left in the stock.

Toys and games developer Character Group hit a three-year high as it gave investors a bullish Christmas trading update. Four-month sales to the end of December were up 35 per cent, sending the shares to an intra-day high of 131.5p, 6p firmer, before a bout of profit-taking saw the stock end the session half a penny better at 126p.

Investors are pricing in a worst case scenario at Disperse Group, the AIM-listed cosmetic testing group. The shares took a hammering as one seller took a hefty discount to get shot of 5 million shares. The shares shed 1.45p to close at 0.67p, a drop of 69.3 per cent and a new all-time low.