Market Report: Miners power ahead but market lacks direction

The miners strengthened in the face of a weak market last night, with the likes of Rio Tinto and Xstrata trading higher as analysts studied the prospects for Chinese deal activity.

Rio rose by 124.5p to 3,173p and Xstrata was marked up by 33.7p to 951.9p as the wider FTSE 100 struggled to find direction, ending 8.8 points lower at 5,139.46, and the FTSE 250 lost 35.16 points to 9,691.32.

The strength came against the backdrop of some reassuring words from Citigroup, whose analysts said that while some in the market remain worried about the prospect of a step-down in Chinese growth, the country "remains structurally short of a number of commodities on a long-term basis".

Given its needs, the broker reckons China may aim to close the shortfall by stepping up the pace of acquisitions, "which is likely to increase the competition for assets" and provide support to mining valuations.

"To date, Chinese companies have completed around $70bn in foreign acquisitions in the resources sector, of this around $41bn or 60 per cent has been in the oil and gas sector and around $28bn or 40 per cent has been made into the metals and mining space," Citi said, noting that the "rate of investments made by Chinese companies abroad has increased over the past three years, with a large amount of transactions occurring in the financial downturn of 2008/09."

And while so far the focus has been on developed countries, the broker said the Chinese were increasingly branching out, possibly reflecting a growing appetite for risk on the part of the acquirers.

Besides Rio and Xstrata, BHP Billiton was 55.5p stronger at 1,872p after Barclays Capital abandoned its cautious view. Moving the stock to "overweight" from "equal weight", the broker said it had grown relatively more positive on mining companies "that are positioned to generate attractive risk-adjusted returns and have equity valuations at a discount to the sector average". Given its new bias, Barclays went on to name BHP as one its "preferred miners".

Overall, the bears reigned supreme amid growing caution about the impact of fiscal austerity measures coming down the pipe in the UK and elsewhere. The concerns were sparked by Cable & Wireless Worldwide, the telecoms group which fell by more than 17 per cent or 14.55p to 69p after warning on the impact of UK public sector cuts. The read-across dampened the mood around others with exposures to the domestic public sector, including the outsourcers Capita, down 22.5p at 718p, and Serco, down 33p at 537p.

Later in the afternoon, sentiment took another hit following the release of a disappointing report on the US housing market. The data was preceded by poorly received quarterly earnings from technology giants IBM and Texas Instruments. The latest figures from US investment bank Goldman Sachs also proved uninspiring.

On the upside, the luxury goods group Burberry sidestepped the downdraft, throwing on 14.5p to close at 819.5p after Investec reinstated coverage of the stock with a "buy" view. Like Nomura and UBS, both of whom raised their targets earlier this week, Investec welcomed the company's move to buy out its Chinese franchisees. The broker said China had the potential to end up as the single largest luxury goods market in the world, noting: "The Chinese market is forecast to grow at 15 per cent this year, almost twice as fast as the global market."

Further afield, broker support underpinned Amlin, the Lloyd's of London insurer which added 5.3p to 422.7p after Jefferies adopted a "buy" stance. "Consistently positive underwriting results in the face of heavy market losses in 2005 and 2008 has underlined Amlin as the quality underwriting choice," the broker said, setting 478p target price on the stock.

Back on the downside, the fixed-income fund manager Bluebay Asset Management was 8.2p behind at 282.7p after Numis scaled back its forecasts and trimmed its target for the stock to 360p from 441p. The broker stuck to its "buy" view, however, saying that while a "forecast downgrade is not positive", it expected a good performance from the underlying business.

Housing stocks were broadly under pressure, though Barratt Developments, which fell by more than 5 per cent on the back of a disappointing house price survey on Monday, managed to close broadly unchanged at 93.8p, down 0.1p. The resilience followed a push from Panmure Gordon, which said the stock was "fundamentally undervalued at current levels".

"Although we acknowledge that the group would be among the first to have to take write-downs should house prices fall significantly from here, with the business achieving a net interest margin of around 5 per cent, it does have a 'buffer' in place," the broker said, repeating its "buy" view.

Profit-taking weighed on Weir, the industrial pumps manufacturer, which was 27p down at 1,155p after Goldman Sachs abandoned its "buy" view on the stock. Though still positive on the business, the broker lowered Weir to "neutral", noting that the recent run of strength had eaten into the potential upside offered by the shares.