Market Report: Cairn eases as broker warns on valuation

Cairn Energy fell back last night, trading lower as the London market flirted with levels not seen since November. The oil and gas explorer and producer was 26p behind at 1,871p after Morgan Stanley called time on the valuation, telling clients that its recent strength and the narrowing of the discount between the Cairn share price and that of its India-listed business weighed against the stock.

The broker added that there was little chance of positive news in the short term, as the company was unlikely to release any new material information on its key development in the Indian state of Rajasthan.

"We have increased confidence in the resource base in Rajasthan and the company delivering first oil in the third quarter of 2009," the broker said. "However, with the [business] understandably focused on meeting this target, we see limited short-term catalysts for the shares."

Morgan Stanley also played down the possibility of a bid, arguing that suitors were like to wait in the wings until the Rajasthan development was onstream and oil was flowing through the pipeline.

Overall, the FTSE 100 touched an intra-day low of 3,772.45 – its lowest level since November – before recovering to 3,816.44, down 34.29 points, at the close. Investors were unsettled by new problems at AIG, the American insurance giant which was said to be in talks regarding another government-sponsored bailout, and worries about Citigroup, the banking giant which has endured some heavy selling over the past week.

The FTSE 250 also weakened, losing 13.59 points to 5,905.75, as UK-focused investors digested news that tighter credit conditions had precipitated a sharp fall in business investment in the three months to December.

Worries about US financials affected parts of UK-listed banking and in-surance sectors, which gave back gains from earlier in the week. Friends Provident was the hardest hit, falling by almost 10 per cent, or 7.4p, to 67.8p, while Prudential lost more than 7 per cent, or 22p, to 266.75p.

Besides the general shift in sentiment, the sector was also hit by chatter about a possible rise in short-selling activity and news that Standard & Poor's was considering changing ratings for so-called multi-line insurers, which bundle the risk exposures of multiple insurance obligations into one contract. Aviva, a FTSE 100-listed multi-line insurer, was down just over 5 per cent, or 14.5p, at 272p.

Among banks, Lloyds Banking Group, down 5.1 per cent, or 2.9p, at 53.9p, was the weakest. HSBC was down 2.25p at 472p, while Standard Chartered eased 8p to 653.5p.

Royal Bank of Scotland kept its gains, however, adding more than 4 per cent, or 0.9p, to 22.1p, as in-vestors awaited more details on its restructuring plans, which are ex-pected with the company's full-year results tomorrow.

Elsewhere, Vedanta Resources was 4.5 per cent, or 25p, behind at 529.5p after Citigroup reduced its target price for the mining group's stock from 790p to 725p.

"We had assumed fairly rapidly declining costs at Vedanta to arrive at our earlier earnings expectations. However, we believe that other mining groups have demonstrated quicker action at the project level than Vedanta in attempts to cull costs..." the broker said, cutting its earnings per share forecast for the current year from £1.71 to $1.35.

Also on the downside, Invensys lost 4.2p to 149.2p after Morgan Stanley set an "underweight" rating on the technology group's stock. The broker said: "We believe the earnings risk for 2010 is likely to dominate the debate on Invensys as our proprietary checks suggest significant cuts to capital expenditure for the oil and gas sector, the core end market for the [company's] Process Systems [division]."

GlaxoSmithKline was 12p behind at 1,106p after the high-profile hedge fund manager Crispin Odey said defensive stocks such as those in the pharmaceutical sector presented attractive short-selling opportunities owing to their high price-earnings ratios.

Among smaller companies, JJB Sports fell by 6.5 per cent, or 0.6p, to 8.99p on rumours that a buyer had dropped out of the race to acquire its fitness clubs business. No names were mentioned.

NetPlay rose by 4.1 per cent, or 0.7p, to 18.7p after the gaming firm unveiled an exclusive TV distribution deal with Channel Five to launch its Eurotelemillions.com service.

The coal miner New World Res-ources fell to 200p, down almost 9 per cent, or 19.7p, after Arbuthnot repeated its "reduce" recommendation on the back of the company's preliminary results.

Allied Gold, on the other hand, jumped to 22p, up 6 per cent or 1.2p, after the company raised $30.7m via an oversubscribed placing of 61.5 million shares. Ambrian, which maintains a "buy" rating on the company's stock, welcomed the move. "While the downside is clearly dilution, we think that, like its larger peer Centamin, a strong balance sheet should not only attract new investors, but also effectively enable the company to make hay while the sun shines," added the broker.