Market Report: Bargain-hunters pile into banking sector

A feeling that banks may have been oversold in recent sessions prompted a sharp turnaround in sector share prices last night, with the Royal Bank of Scotland, more than 20 per cent, or 3.7p, stronger at 21.8p, leading the way upwards.

Hedge funds were said to be following Odey Asset Management's lead and opening long positions in lenders, a number of whom have been trapped in a downward spiral since Lloyds Banking Group said its HBOS unit was on track to report heavy losses.

Traders said investors were placing bets against the prospect of full nationalisation, spurred on in part by recent reports that Odey had turned positive on the sector.

Lloyds, which was almost 12 per cent, or 6p, firmer at 56.8p, gained additional support from a UBS report, which said that the bank's share price was beginning to factor in a near 100 per cent probability of either a further dilutive capital increase or nationalisation. "Neither outcome is a foregone conclusion, in our view," the broker said,

"For the Lloyds share price to rise, all that needs to happen is that the markets' view of the probability of 'bad' outcomes reduces. A decline in the likelihood of either nationalisation or recapitalisation to around 80 per cent should drive the stock to around 80p."

Some remained cautious, however, with one market watcher saying that the situation was still very fluid as a slowing economy was liable to increase the number of bad debts as hitherto stable loans turn sour. Another added that the moves may be down to nothing more than a relief rally.

In the wider sector, HSBC, 6p down at 498p, and Standard Chartered, flat at 690p, missed out on the shift in sentiment as traders focused on the economic storm clouds gathering over Asia, a region to which both are heavily exposed.

Overall, the FTSE 100 managed a slight recovery to 4018.37, up 11.54 points, but the FTSE 250 which, owing to the mix of its constituents, is seen as more representative of the domestic economic picture, retreated to 6217.86, down 27.91 points, as investors digested news that public finances had taken a sharp turn for the worse last month.

There was no recovery in Legal & General, the life insurance group which was down 6 per cent, or 2.4p, at 37.6p after announcing a cut in payouts for with-profits policyholders owing to tougher investment markets.

Rexam, the consumer packaging group which posted in-line results yesterday, saw its stock tumble towards the bottom end of the benchmark index, losing 10.02 per cent, or 31p, to 278.5p, after the ratings agency Standard & Poor's lowered its long-term corporate credit and senior unsecured debt ratings for the company.

Elsewhere, market rumours proved right on the mark with Land Securities, the commercial property group which joined the list of companies looking to raise funds from shareholders. The stock was 2.73 per cent, or 15.5p, weaker at 552.5p after Land announced plans to raise around £756m to bolster its balance sheet in light of the deteriorating economic outlook.

Liberty International, down 4.18 per cent, or 15.2p, at 350p, also attracted attention, telling the market that, in keeping with recent speculation, it was considering "capital raising alternatives".

Although there was no detail on the amount of the possible fundraising from the company, bankers reckon Liberty may eventually go for as much as £500m.

Sentiment around DS Smith, the packaging and office products group, was undermined after Goldman Sachs switched its stance on the stock to "sell" from "neutral", telling clients that falling demand and lower prices for container board and corrugated boxes in the UK could cause the company to underperform.

"Concerns over the group's debt covenants and dividend are also likely catalysts, in our view," the broker said, sending the stock to 70.5p, down 7.24 per cent, or 5.5p

On the upside, the computer games retailer Game rose to 143.75p, up 2.68 per cent, or 3.75p, after Pali International initiated coverage on the stock with a "buy" rating.

"We do not think that the market gives enough credit to Game's secular growth characteristics, and its miserly rating is pricing in a far bigger fall in profits than we think is likely over the next two years," the broker said, setting a 200p target price on the stock. It added: "This is not a 'normal' cycle, as the market is considerably broader than ever before in terms of both the type of console and the customer segment."

Among smaller companies, the AIM-listed miner Firestone Diamonds gained 22.03 per cent, or 3.25p, to 18p after announcing that, along with ADP Projects, it had been selected as preferred bidder for a plant at the Jwaneng Mine in Botswana, the world's largest diamond mine by value.

The gaming group AsianLogic, on the other hand, saw its shares slump by almost 18 per cent, or 6p, to 27.5p after saying higher levels of capital expenditure were likely to pressure 2009 pre-tax profits, which were likely to fall behind the levels achieved last year.