Market Report: L&G climbs higher as bid chatter persists

Legal & General enjoyed another day of gains as the FTSE 100 notched up its strongest quarter on record last night. The insurer, which has been among the best-performing blue chips all week, rose another 6.1 per cent, or 5.05p, to 87.8p as bid rumours persisted.

Traders narrowed the field of possible suitors for L&G to Resolution and Australia's AMP, with some still touting the prospect of a merger with Standard Life, which gained 5.8p to 219p. Generali, which was rumoured to be in the running on Tuesday, said it was not interested in Legal & General.

The stock also benefited from some words of support from Deutsche Bank, which abandoned its negative stance. Moving L&G from "sell" to "hold", the broker said the recovery in the corporate bond market had reduced concerns about the group's capital position.

"While this still leaves annuity providers such as L&G very much at the mercy of bond markets in the long term, the short-term risk of any forced capital raisings is now sharply reduced," Deutsche said, raising its target price for the stock from 58p to 82p.

Deutsche also weighed in on Aviva, which gained 16.9p to 448.1p after the broker reiterated its "buy" stance, citing the planned partial listing of Delta Lloyd and the re-attribution of the UK with-profits estate.

"Further capital release should be expected as a result of the re-attribution of the UK with-profits estate, on which we understand 87 per cent of the policyholders have now voted in favour," the broker said.

"Our expectation is that this could release some £300m of capital in the first year alone, and some £120m per annum thereafter in the form of lower new business strain, allowing management to achieve better returns on this elsewhere."

Overall, the FTSE 100 fell back by 25.82 points to 5,133.9, while the FTSE 250 dropped by 73.26 points to 9,142.31 as investors moved to bank profits on news that the Chicago Purchasing Managers Index, a key regional gauge of manufacturing activity in the US, fell to 46.1 last month, indicating contraction.

Economists had pencilled in an increase to 52, and the data sparked a sell-off on both sides of the Atlantic. Despite the decline, the FTSE 100, which rose by almost 21 per cent between July and September, registered its strongest quarter on record.

David Jones, the chief market strategist at the spread-betting firm IG Index, said the strong quarterly performance should not mask the fragile nature of the gains. "[The afternoon's] sudden slide across global markets is probably a sign that a small wave of downbeat data can breach fragile confidences, and that there is some way to go before a return to the pre-recession, carefree days of pre-summer 2007," he said.

On the FTSE 100, Land Securities fell 13p to 625p after Panmure Gordon slapped a "sell" rating on the stock, citing uncertain market conditions. "The UK economy remains in recession, suggesting continued uncertainty for the occupational market and we therefore believe rents are likely to remain under pressure," the broker said, setting a 573p target price.

Land's sector peer Hammerson was also weak, retreating by 8.7p to 394.3p after Collins Stewart switched its stance from "hold" to "sell", saying that the portfolio growth implied by a recent rally in the commercial property sector appeared "optimistic".

Elsewhere, the software group Sage gained 4.9p to 233.4p thanks to Morgan Stanley, which upped its stance on the stock from "equal weight" to "overweight", saying that current consensus expectations were too low.

"Sage has been proactive in adjusting costs, quickly taking £49m of costs out of the business, with 50 per cent of these in 2009 and 50 per cent in 2010. They have taken the £23m charge for this above the line," the broker said. "Given the business is now right-sized, there should be about £50m of leverage in 2010, if the top line is stable as we expect. Any market improvement could add to this in 2011."

UBS boosted Tesco, which was 3.2p firmer at 399.6p, after the broker raised its target price for the stock from 400p to 425p. Looking ahead to the supermarket group's interim results next week, the broker said the lack of a second-quarter trading update "adds interest to the numbers, especially on the UK like-for-like trend and outlook statement". "Asia seems to have staged a strong recovery from an indifferent first quarter, but reassurance may be needed on Europe, given the difficult macro backdrop," UBS added, reiterating its "buy" recommendation.

Further afield, Enterprise Inns closed 9.1p weaker at 124.5p following some bearish commentary from Collins Stewart, which maintained its "sell" stance on the stock.

"Enterprise must refinance its £1bn facility during 2010. Since it is unsecured bank debt, it must be done at par and we doubt the 50 [or so] banks will all roll over," the broker said.

"If they do, then 80 basis points over Libor is unlikely to be sustained, suggesting a significant increase in the cost of debt. If they do not and pub sales are slow, a rights issue is quite possible."