Market report: Friday close

By This Is Money
Updated: 12:06 EDT, 14 September 2007

Hopes that Northern Rock's predicament would not trigger a mass sell-off proved shortlived, with investors offloading everything, but especially mortgage providers, housebuilders and High Street retailers.

The repercussions of Northern Rock's liquidity problems and profit warning took a while to sink in, but eventually the market woke up to the realisation that there will be much less cheap money to flash around on homes and high street consumables.

The FTSE 100 index, down by 130 points at one stage, rallied to close down 74.6 points at 6289.3. Traders said the falls would have been steeper had it not been for strong performances from the Asian markets and Wall Street, where the Dow Jones climbed 133.20 points to 13,424.90, with some experts predicting the beginning of the end of the credit crunch in the US.

In London, Northern Rock just kept on falling, giving up 31% of its stock market value, with a 201p drop to 438p.

Despite no fresh admissions of similar problems, investors were feeling very uncertain about Alliance & Leicester, down 64½p at 873p, a fall of 8%, while Bradford & Bingley was also marked down more than 8% at 329½p, a 27½p fall.

Barclays was 19p lower at 596p, while HBOS dropped 32p to 860p, down 2%. Broker Collins Stewart was advising clients to switch into Lloyds TSB, 14½p off at 520p, and HSBC, 1½p up at 888p.

In terms of broad sector impact, the effect on the housebuilders was almost worse, with Barratt Development lower at 829½p, a fall of 41p, and Persimmon 72p lower at 1016p. Upmarket estate agent Savills suffered too, down 16¾p at 408¾p. One analyst said he could see housebuilders fall by as much as 40%.

Wolseley, the plumbing business badly exposed to the US housing market, was another of the day's biggest casualties, falling 37p to 921p after a savage review from one of the City's leading brokers.

Credit Suisse downgraded the shares to underperform from neutral and slashed a whopping 300p - almost 40% - off its target price. Wolseley has already suffered more acutely than the rest of the FTSE 100 in the current downturn, underperforming its bluechip peers by 8%.

But Credit Suisse reckons it could still disappoint and has priced the shares at 850p. The broker sees only a 'low probability' of a bid for Wolseley, given the tightening credit market. 'The market appears to be pricing in a downgrade of some magnitude but we think there may be further to go.'

Some experts are warning that the current financial-market uncertainty could affect bookings for airlines such as British Airways, 10¾p lower at 382¼p. UBS has lowered its forecasts and target on the carrier, noting that inbound leisure traffic has been weak all year and this is likely to continue.

Despite strong, underlying demand for business and first-class tickets, the market turmoil adds a layer of risk, it says. But BA moves into Terminal 5 this week, which could be the key to the much-needed improvement in customer service. 'The only way is up for customer service and Terminal 5 should play a big part in that,' says UBS.

Only one blue-chip company posted any gains. Publisher Reed Elsevier managed a 6½p rise to 608p, cheered by an upgrade from Merrill Lynch which sees it move from neutral to buy with a 695p price target.

Merrill analysts revisited the logic behind a tie up with Wolters Kluwer and, while warning that no deal is imminent, it concludes that the argument for a merger is 'compelling'. In its scenario, it sees Reed mount a debt-financed bid for Kluwer at €28-€30 a share that would boost earnings by 20% a year and provide cost savings of £250m a year.

Several smaller oil producers also did well, with Dana Petroleum ahead 19p at 1000p, Burren Energy 15p higher at 853p and Tullow Oil up 1p at 553½p.

Taking stock: Sectors at a glance

BANKING AND FINANCE

Paragon could be an early casualty of the credit-crunch crisis, says KBC Peel Hunt. The broker is advising clients to get out of the speciality finance provider and is raising concerns that Paragon may have difficulty clearing its £1bn warehouse of loans originated at the top of the housing market.

BUILDING AND PROPERTY

Building group Kier's sector-busting performance could have read across for Galliford. Down by 20% since their peak, Galliford and Kier should benefit from the Government's renewed focus on affordable housing. Dresdner Kleinwort likes both, and has repeated its buy rating and 7% upgrade to Galliford's forecast earnings.

CONSUMER

The future isn't looking so sweet for Tate and Lyle, as prices slip and insiders predict only minimal growth for its sugar substitute Sucralose. Numis does not consider the manufacturer a long-term investment, and has given it a reduce recommendation with a target price of 450p, significantly below its current 557p.

ECOMONICS

China's investment in factories has rocketed by 26.7% in the past year as the country's industrialists have fought to keep up with demand. The figures increase the pressure on the country's central bank to increase rates after inflation accelerated to the highest in almost 11 years and the trade surplus widened.

ENGINEERING

Cosalt's £30m acquisition of GTC will significantly increase the size of the group, and will involve a major share placing to pay for it. While current trading for the tools and equipment provider seems to be going well, Landsbanki said it was withdrawing its recommendation until the new share issue is away.

HEALTH

Drug manufacturer ProStrakan has found a fan at Credit Suisse. The broker has upped its recommendation from neutral to outperform following the half-year results showing that losses are narrowing. Noting that the shares are 40% down since April, Credit Suisse has trimmed its price target by 7p to 97p.

LEISURE

Tuck into restaurant group Prezzo, says Nigel Parson at Evolution Securities. He has raised his forecasts to reflect better margins that have mostly been achieved by squeezing cost savings out of suppliers. Next year's cash surplus could pay for more openings or share buybacks. Evolution's share-price target is 95p.

MEDIA

Dresdner Kleinwort is leaving its forecasts for ITV unchanged despite the planned increase in investment in broadband and programming. After ploughing through Michael Grade's strategy review, the broker says it remains 'convinced of the long-term upside potential at ITV' but adds: 'This probably makes it a 2009 earnings story.'

NATURAL RESOURCES

World oil prices fell slightly today, taking some of the pressure off petrol stations to raise prices. As a hurricane subsided in the Gulf of Mexico, Brent crude fell 32 cents a barrel to $76.80 while US crude for October fell 42 cents to $79.67. Oil prices are still up 31% this year, and traders are eyeing the next storm in the oil-rich Gulf of Mexico.

RETAILING

It's not all doom and gloom on the High Street. Kaupthing is tipping Topps Tiles to produce a punchy report on recent sales come its pre-close trading update in a couple of weeks. A 5% like-for-like sales increase in the second half would not be 'unreasonable' and upgrades could ripple through to next year.

SUPPORT SERVICES

With Metronet a soon-to-be-forgotten nightmare, forecasts for WS Atkins have been upgraded by Numis for the second time in recent weeks, this time by about 3%. Further uplifts could be on the cards once more is known about trading. Most interestingly it sees the potential for a share buyback of between £50m and £150m.

TECHNOLOGY

Research commissioned by Misys has revealed enormous dissatisfaction with the IT solutions company's products and the customer support it offers. While there are plans to improve the customer experience and revamp its range, the malaise runs so deep that insiders believe a huge restructuring programme is required.

TELECOMS

It could be worth dialling up Vodafone, says renowned chartist Richard Lake of Brewin Dolphin who, after consulting his graphs, says that the telecoms giant's 'laboured recovery' could carry it as far up as 200p. The shares are currently 166p, and he suggests fans buy now, noting: 'It is the strongest stock in the top 10.'

TRANSPORT

Toyota is building a vast new car plant in Japan in an attempt to take the pressure off its factories around the world. Its global sales have surged ahead of rival General Motors to make it the biggest seller in the world, and that has put strain on its domestic factories. Reports said the new plant will cost $870m (£429m).

UTILITIES

Drax, which has been booted out of the FTSE 100, will have to work harder to find favour with investors now. Lehman Brothers has cut its target by 90p to 540p and says it remains exposed to softening UK gas and electricity markets over the medium term, and adds that its costs will rise because of more expensive coal.