Market Report: Sell-off news lifts Lloyds, dashes RBS

The Government fired the starting gun on the reprivatisation of state-backed Lloyds and Royal Bank of Scotland yesterday, setting a deadline of 8 July for banks to submit bids as advisers on the sale.

Lloyds hit a two-year high on the back of the news, but RBS slumped. While Lloyds’ shares are already above the break-even point, RBS has seen its shares tumble since chief executive Stephen Hester was forced to step down earlier this month under pressure from the Chancellor.

The feeling among investors is that RBS is not yet ready to be sold. Lloyds added 0.3p to 63.16p, while RBS sank 2.3p to 273.5p. Barclays also took a serious hit on the back of the news, plunging 7.8p to 278.45p.

The benchmark index ended a week of gains with “apocalypse postponed, rather than cancelled indefinitely”, according to Chris Beauchamp at IG.

Despite Friday’s close marking the first week of gains on the top-flight index since mid-May, it also signalled the first monthly fall on the FTSE 100 in over a year, as uncertainty over future central bank stimulus spooked investors. The close, down 27.93 points at 6,215.47, is a far cry from the 13-year high of 6,875.63 in late May.

Mr Beauchamp said: “A few days of gains doesn’t really remove the feeling that the optimistic outlook which drove the first-half rally is now permanently broken. As the third quarter dawns, it is likely that fears about Fed tapering will resume their place at the forefront of investors’ minds.”

The day’s worst performer was the troubled Kazakh miner ENRC, which fell to its lowest level since November 2008 on the back of fears over the Chinese credit crunch and a downgrade from UBS.

Daniel Major at the bank thinks that the impending takeover bid from a consortium of the firm’s founders and the Kazakh government is likely to be accepted despite the company’s independent committee saying the offer “materially undervalues the company”. Shareholders have “limited alternatives”, according to Mr Major. ENRC lost 7.8p to 204p.

A note from Barclays on the Chinese credit crunch hit the wider mining sector. Analysts pointed out: “China accounts for 43 per cent of global copper demand and 65 per cent of iron ore demand; these two commodities combined account for 75 per cent of UK mining sector earnings,” meaning any tightening of the belt for China’s construction and manufacturing sectors will hit blue-chip miners.

Antofagasta tumbled 21.5p to 795p, and Glencore Xstrata slipped down 5.15p to 272.15p. But there were some winners on the market. Pearson’s firm denial it was selling the FT won it admirers among investors. The Malaysian business magazine The Edge Review claimed Pearson was close to selling the FT group to the the Abu Dhabi state media group and News Corp for a reported $1.2bn (£785m). Pearson said the FT is an “integral” part of its business and denied the sales rumour.

In the wake of the news, Liberum reiterated its sell rating. Ian Whittaker at the broker said that away from the rumours, “the shares are not factoring in the increasing structural pressures being seen in their North American education business”. Pearson added 17p to 1,171p. Goldman Sachs put out an upbeat note on Magnums-to-Tresemmé maker Unilever and spirits giant Diageo, whose brands include Baileys and Johnnie Walker. Goldman added the pair to its conviction list, saying the recent market dip has created “a rare and attractive opportunity to buy structural winners whose fundamentals remain intact”. Unilever added 16p to 2,662p while Diageo dribbled down 11p to 1,880p.

Vodafone jumped after an upgrade from Deutsche Bank to buy. David Wright at the bank thinks the telecoms giant’s recent purchase of the German cable business Kabel Deutschland is a “tipping point” for a possible deal with Verizon in the US. Vodafone dialled up a 1.5p gain to 187.85p.

The outsourcer Serco was top of the table after an upbeat trading statement. The company, which operates the docklands light railway and Barclays cycle hire scheme, said it is on track to meet full-year expectations and expects a modest improvement in the rate of revenue growth. It jumped 16p to 616.5p.

It’s time to give up smoking, according to the scribblers at Jefferies and Credit Suisse. Analysts at both firms cut their target price for British American Tobacco. It stubbed out 71.5p to 3,367.5p.

Buy

Thomas Cook

Snap up shares in Thomas Cook, say the analysts at Oriel Securities. The travel group recently unveiled a £1.6bn refinancing plan, and the scribblers believe that with it “on a firmer financial footing… management can now concentrate on operational improvements”. Keeping their “buy” call, they claim the “business is being transformed by a new management team and while shares have risen strongly, we consider there is further recovery potential”.

Hold

Sage

Keep a tight grip on Sage, advises Panmure Gordon. The broker says the software company has “a slew of new products and sales initiatives to talk through” at its investor event next week, but adds that Sage’s “many product initiatives have yet to move the forecast needle – and we need evidence that the ‘good stuff’ from engineering is being sold”. Panmure keeps its “hold” call and 318p target, with Sage currently at 340.2p.

Sell

Serco

Get rid of your Serco shares, Investec says. The broker’s Gideon Adler has not been persuaded by the outsourcing giant’s update yesterday to change his “sell” recommendation, saying he is cautious into the second half of the year with “no inorganic support from acquisitions, and a reduced level of contract wins in 2013 so far”. He has a price target of 550p for shares that closed at 616.5p.