Market Report: Aviva gains on sector consolidation hopes

The prospect of consolidation in the life insurance industry drove Aviva 3.3 per cent, or 11p, higher to 343p last night. As investors await the conclusion of the Resolution-Friends Provident saga, the bulls have been busy indulging in their favourite activity: identifying the next probable target in the sector. Although a consensus has yet to emerge, those rooting for Aviva received a shot in the arm yesterday after Deutsche Bank said the company and its rival Prudential were among the most likely to benefit from a revival of deal activity.

"We believe that consolidation of the industry is increasingly inevitable, with both the new-business market and back-book management becoming a scale game," the broker said. "In our view, smaller players (eg Friends Provident) are likely to be the first to be consolidated, along with selected foreign-owned insurers.

"Consolidation involving the remaining UK-quoted life assurers may take longer given greater relative scale. Nonetheless, if a reasonable market develops for closed books, we highlight Prudential and Aviva as potential gainers."

Given the recent weakness of the stock, Deutsche switched its stance on Aviva from "hold" to "buy" and revised its target price upwards from 385p to 401p. For Prudential, which was also rated a "buy" and closed 1.5 per cent, or 6.25p, stronger at 434.75p, Deutsche raised its target price to 530p from 510p previously.

Overall, the FTSE 100 rose slightly, up 18.69 points to 4547.43, while the mid-cap FTSE 250 firmed up by 31.43 points to close at 7762.59. Sentiment held up well, with Tim Hughes, head of sales trading at IG Index, saying: "The 4,500 level looks pretty solid and investors will be using it as the baseline from which to target further gains. Aside from the risk of investors suffering a mass attack of vertigo at these levels, the [Footsie] hasn't looked this healthy in months."

The consumer packaging group Rexam was the worst-performing blue-chip of the day, sliding by more than 8 per cent, or 22.5p, to 253.75p after it unveiled a fully underwritten, four-for-11 rights issue in an attempt to raise £350.7m before expenses.

The group also published its half-year results, saying there would be no interim dividend. Analysts at Charles Stanley explained the group's actions by referring to its debt position, saying: "It basically had too much debt and it feared losing its investment grade rating and being downgraded to junk status, which could have placed an additional £70m financial cost on the group in 2011. It feared this downgrade because the effect of the recession is now expected to be deeper and more prolonged than was initially believed."

Elsewhere, the banking sector was mostly firm as investors looked ahead to the string of updates due next week. Royal Bank of Scotland, which is due to publish its interim results on 7 August, gained 3.6 per cent, or 1.495p, to close at 43.495p, while Lloyds, which will publish its half-year numbers on Wednesday, climbed by 3.1 per cent, or 2.5p, to 83.8p.

Also rising was the fund manager Schroders, which advanced by 4.6 per cent, or 42p, to 951p after Morgan Stanley issued a double upgrade and moved the stock from "underweight" to "overweight", with a revised target price of 1045p, compared with 710p previously. "We believe consensus (20 per cent below our numbers) underestimates the earnings upside risk from a strong rebound in high-margin retail flows," the broker said. It added that, despite the headwinds facing Schroders' Asian and US units, it expected "positive surprises for the market" when the company posts its interim results early next month.

Further afield, the broker unsettled the FTSE 250-listed Aberdeen Asset Management, which was slightly weaker at 129.75p, down 0.25p, after being moved from "overweight" to "equal weight" on valuation grounds.

Morgan Stanley also weighed in on supermarkets, saying that while it had raised its target price for Tesco from 310p to 390p to reflect a change in methodology, it preferred J Sainsbury. "Sainsbury's growth plans [with new space in the UK] may not be as punchy as Tesco's [with its Personal Finance, Fresh & Easy, Indian cash and carry outlets], but in our view they are lower risk and are likely to generate higher returns," the broker said. At the close, Tesco was 2.8p ahead at 372.7p, while Sainsbury's gained 4.25p to hit 323.5p.

On the second tier, Lloyd's of London insurers were in focus after JP Morgan weighed in on the sector, saying the valuations had turned "more attractive" in recent weeks. The broker said Catlin, which was 2p stronger at 312p, remained is preferred pick in the sector. Amlin and Hiscox, both of which were moved from "underweight" to "neutral" at JP, were 0.75p weaker at 328.75p and 6.5p ahead at 305p respectively.

Among the smaller companies, the computer chip designer ARC International's shares surged by almost 28 per cent, or 3.25p, to 15p as investors celebrated news that it was discussing a takeover offer with an unnamed third party. ARC stressed that the discussions were at a preliminary stage, and there was no certainty that an offer would be forthcoming.