Market Report: Bulls shop at Sainsbury's on growth hopes

J Sainsbury gained ground last night as traders looked beyond the immediate outlook to the prospects for growth in the long term.

The bulls were lured by the analysts at Bank of America Merrill Lynch, who said that the supermarket group stood to make gains as the grocery market improves. To begin with, Sainsbury's will benefit as Tesco focuses on running its UK business for cash, rather than gunning for growth. At the same time, a growing and more affluent world population is likely to put pressure on commodities, driving up food prices, which should nonetheless remain affordable for the UK consumer. This should drive UK food inflation "to be more in-line with, or ahead of, overall inflation" in the next five to ten years, compared to "food experiencing real deflation" in the last decade or so, the broker explained, raising the prospect of more benign conditions in the UK grocery market in coming years.

While a more favourable backdrop "will provide oxygen to all the UK grocers to build returns", Sainsbury's looks particularly well placed thanks to a repositioning of the offerings in food and improvements in the non-food part of the business. "As an operationally geared business, even small improvements in sales density have a disproportionate effect at the bottom line," Merrill said, revising its stance on the stock, which rose by 8.2p to 346.6p, to "buy". Tesco, which is rated "neutral" at Merrill, was also higher last night, adding 2.5p to 442.7p.

Overall, sentiment improved as traders welcomed clarity on the EU-backed rescue plans for the Greek economy, though profit-taking in the heavily weighted mining sector capped gains. At the close, against the backdrop of the Dow Jones Industrial Average touching highs above the 11,000-point mark, the FTSE 100 index was 6.67 points better off at 5,777.65, while the FTSE 250 added 18.49 points to 10,481.77. Randgold Resources, down 105p at 5,355p, and the Eurasian Natural Resources Corporation, down 17p at 1,221p, were among the weakest of the miners. Kazakhmys at 1,577p, down 14p, and Vedanta Resources at 2,915p, down 4p, were also marked down last night.

Over in the banking sector, the news from Greece lifted the mood, with Royal Bank of Scotland rising by 0.2p to 44.9p and Barclays adding 8.15p to 364.65p. The latter moved up despite some bearish comment from Bruce Packard, the banks analyst at Seymour Pierce. Lloyds was also higher, gaining 0.44p to 64.53p, after Royal Bank of Scotland analysts reiterated their "buy" view, terming the Lloyds investment case "a classic restructuring opportunity" that, over two to three years, should cause the bank's equity price to "more than double".

Elsewhere, ARM, the semiconductors group which managed to stand firm despite some cautious comment from Liberum Capital on Friday, gave way, easing by 9.2p to 234.8p after Citigroup turned negative on valuation grounds. The broker said that while the company can still outgrow its peers this year, and though the upcoming quarterly figures are likely to be accompanied by some positive commentary on industry growth and on the deal pipeline, the share price had run ahead of fundamentals. Indeed, at current levels, the valuation calls for "pristine" quarterly results over 2010, raising the prospect of pullbacks.

"Even examining the revenue opportunity from rising penetration of ARM-based chips in mobile PCs, a key driver of the shares over the last 12 months, we estimate ARM would need to capture [a] 100 per cent share of the market in order to materially increase revenue estimates in the medium term," Citi said, switching its stance to "sell" from "hold", albeit with a revised 210p target price, compared to 190p previously. "We remain bullish on the global semiconductors sector over 2010 and advise 'buying the dips'," the broker added, expressing a preference for CSR and Wolfson Microelectronics, both of whom were held back nonetheless, ending 1.1p behind at 443.4p and 1.25p lower at 154p respectively. "We believe consensus underestimates the competitive strength of CSR," Citi said.

Further afield, the defence group Qinetiq, up 3.5p at 137.8p, drew steam from recent disclosures of stake-building by the US investment funds Artisan Partners and Ruane Cunniff & Goldfarb. Artisan revealed last week that it had bought just over 5 per cent of the company's shares, while Ruane picked up around 10 per cent at the beginning of March. On the downside, the hospitality group Millennium & Copthorne Hotels fell to 489.3p, down 5.1p, after reporting that a Chinese joint-venture partner had taken a number of unauthorised steps, including firing staff and seizing control of an office.

Back on the upside, the software group Misys swung to 260.1p, up almost 4 per cent or 9.7p, as traders, taking their cue from a weekend press report, revisited the prospects for a demerger of its healthcare business, which currently sits alongside the company's financial services arm. "We think that a demerger looks strategically sensible," RBS analysts said, pointing out that the two businesses have "limited operational synergies and very different valuation drivers".