RBS leads as markets enjoy new year rally

Royal Bank of Scotland rallied by almost 10 per cent after a leading broker turned positive, highlighting the buying opportunity opened up by the weakness in the share price.

Exane BNP Paribas said the correction in recent months, with the stock declining sharply from its August 2009 peak of around 57p, meant that the risk/reward balance had "finally moved far enough to turn outright positive on RBS". The weakness should attract investors, despite the fact that earnings are not expected to turn positive until 2012 and a resumption of dividends is not anticipated until 2013, the broker added, revising its stance on the stock to "outperform" from "neutral".

"We recognise that, for many investors, RBS had become a 'stock to avoid' almost irrespective of price. In the summer of 2009 it also became remarkably expensive!" Exane said. "However, with the halving of the share price over the past four months and an expectation that, over the next few quarters, some early progress in terms of asset disposals will be achieved, and with greater certainty around macro developments, we expect fundamental (rather than purely speculative) investor interest to return in 2010."

Exane's message was reinforced by rumours regarding the possibility of deal activity, and helped to take RBS to 32.1p, up 2.9p. The rumours were sparked by a weekend press report suggesting that the Brazilian lender Itau Unibanco was looking at the possibility of buying a stake in RBS or Lloyds Banking Group as they are sold by the Government. Traders were sceptical, however, pointing out that the taxpayer was sitting on a loss on its investments in both banks. A sale of the Government's shares was seen as unlikely before RBS climbs back above the Government's average buy-in price of 50.5p and Lloyds rises beyond 122.6p. At the close, Lloyds was 1.57p stronger at 52.26p.

Overall, the stock market surged in its first session of the new year, with the FTSE 100 closing just above the 5500-mark for the first time since early September 2008. The benchmark rose by 87.46 points to 5500.34, while the mid-cap FTSE 250 index gained 203.22 points to 9510.11 as traders, boosted by a raft of positive economic data, piled into equities.

Lending statistics from the Bank of England and a Cips survey of purchasing managers in the manufacturing sector lifted sentiment towards the UK, while improving industrial data from India, China and other Asian countries drove confidence in the global economic picture. An upbeat report on US manufacturing activity gave the market an additional shot in the arm in the final hours of play.

Bid talk was in evidence last night, with market rumours suggesting that Nestlé's decision to sell its stake in Alcon to Novartis may be a precursor for the Swiss food's group's entry in the Cadbury, up 7.5p at 805p, bid saga. Traders were unconvinced by the prospect of a bid for the entire group, noting that such a move was likely to attract the scrutiny of competition regulators. The Swiss group was more likely to go after Cadbury's Trident gum unit, they said, making a point that was echoed by Charles Stanley, whose analysts said that "Nestlé's role in the Cadbury denouement is likely to be limited to interest in the latter's gum operations, should Kraft or another suitor emerge triumphant".

Elsewhere, recovery hopes and renewed weakness in the US dollar underpinned gains in the mining sector, with the rising metals prices helping to drive Xstrata to 1162.5p, up 3.7 per cent or 41.5p, and Lonmin, the target price for which was raised to 2050p from 1900p at Bank of America Merrill Lynch, to 2033p, up 74p. The gold producer Randgold Resources, which is one of Merrill's top mining picks for 2010, saw its shares rise to 5140p, up 140p, as gold prices touched a three-week high. "We expect a global economic recovery and continued restocking to drive commodity prices higher in the first/second quarter of the year," Merrill said.

The fashion retailer Next, which was expected to post a trading statement on Wednesday, was in focus, rising by 2.7 per cent or 56p to 2139p, amid rumours that it was going to update the market today. With less than an hour to go before the close, Next confirmed that it will issue a sales update for the 22-week period to 24 December this morning.

On the downside, commercial property stocks fell out of favour after Hammerson, down 2.8 per cent or 11.8p at 412.2p, announced the sale of a Paris office building at around 14 per cent below book value. The news dampened sentiment across the sector, knocking the likes of British Land, which was 13.2p behind at 466.8p, and Land Securities, which was 12p weaker at 673p.

Further afield, parts of the housing sector fell back amid profit-taking, with Bovis Homes declining by 4 per cent or 17.3p to 417.4p and Bellway falling to 792p, down 26p. Persimmon, which is expected to issue a trading update this week, was also unsettled, easing by 7.8p to 461.7p despite some words of support from Panmure Gordon, which said it anticipated a "solid" statement from the company.