Investors remain nervous as US Federal Reserve meets to discuss possible easing of $85bn bond buying programme
One of the traits of a frothy market is a spate of bid rumours, and water companies were the latest victims.
Despite investors taking some of their cash off the table after recent rises in the FTSE 100, United Utilities jumped 15.5p to 703p on talk of a possible £10 a share bid from sovereign wealth funds from Abu Dhabi or Kuwait.
Severn Trent was also in demand, up 34p to £17.92. Traders said the business could be attractive to a predator for its strong cash flow and defensive qualities but they also pointed out that Canadian-led consortium LongRiver recently gave up on a bid after a board rejection. And the regulatory regime surrounding the UK water companies remains unclear.
Overall, the FTSE 100 finished down 52.69 points at 6570.17 on caution ahead of Wednesday's decision by the US Federal Reserve on whether to ease its $85bn a month bond buying programme, one of the key props of the recent market rally. Analysts predict a $10bn cut in the programme, but the outcome is by no means clear. Paul Dales at Capital Economics said:
We expect a small cut in the pace of monthly asset purchases, from $85bn to $75bn. We wouldn't be surprised to see the Fed also emphasise that interest rates will remain low for a long time, perhaps via the publication of its interest rate forecasts for 2016 for the first time.
The day's biggest faller was Aggreko, down 69p at £15.80 after Credit Suisse downgraded the temporary power supply business from neutral to underperform and cut its target price from £20 to £14. The bank said this reflected more challenging conditions in its power projects division:
We expect that underlying growth in the power projects division will turn negative in the second half of 2013 and into 2014. This is due to falling demand as end clients struggle with the effects of weaker currency versus the dollar; the roll-off of the high margin military and Japanese contracts and the on-going effect of a more competitive market place. At 20.2 times 2014 estimated PE, Aggreko still trades above its average multiple and this does not, in our view, reflect slowing growth, falling margins and lower cash flow return on investment.
After the government's sale of a 6% stake in Lloyds Banking Group, its shares fell 2.71p to 74.65p. Joe Rundle, head of trading at ETX Capital, said:
Many will see this as a symbol of the UK's financial system returning to health as institutional investors snapped up the shares on offer, an indication that the market feels far more comfortable with the UK banking sectors' prospects given the upswing we are seeing in the UK economy. Lloyds itself is a leveraged play on the UK economy for investors – if you believe in the UK recovery, Lloyds is the likely long play versus the likes of riskier banks RBS and Barclays.
Miners were mixed. Randgold Resources recovered some of its recent losses, adding 59p to £45.45, but Glencore Xstrata was down 7.7p to 334.2p after UBS cut its recommendation from buy to neutral, citing pressure on copper and coal prices. The bank said:
While we are still attracted to Glencore Xstrata's refreshing strategy and improving free cash flow profile, we expect its valuation to cap performance until the outlook improves for copper/coal prices.
Among the mid-caps, Debenhams added 1.8p to 105p after a positive trading update, saying the warm summer helped sales pick up in the fourth quarter. Full year like-for-like sales rose 2%, and the retailer said it expected to meet profit forecasts of around £153m for the 12 month period.
Pharmaceutical group BTG dipped 2p to 377p after selling its brachytherapy business to Germany's Eckert & Ziegler for an initial $5m plus 30% of revenues for the next 12 months. Investec said:
With the product range already out of action since an FDA warning letter, we think management have taken the right action in disposing of the portfolio to focus BTG on higher priority growth projects, of which there are many. We expect this to have a minimal effect on forecasts and maintain our buy recommendation.
Imagination Technologies slipped back on profit taking following its latest trading update.
The chip designer, boosted by last week's launch of Apple's iPhone which includes its technology, said royalty revenue growth continued to be strong in the final quarter. It predicted revenues of £38m to £43m including its recent acquisition MIPS.
But its shares, up 40% over the past month, closed 9.4p lower at 334.6p after the update.
Transport shares were in focus following an upbeat note on bus and rail companies from JP Morgan Cazenove.
It upgraded both Go-Ahead - up 35p to £16.01 - and Stagecoach - 5p higher at 335.3p - from neutral to overweight, based on their exposure to the deregulated UK bus market and the benefits of the country's improving economy. There is also sizeable potential in their rail businesses, said the bank.
As for the rest of the sector, it repeated its overweight rating on FirstGroup, down 1.9p at 121.6p, but cut its target price from 143p to 137p. On Monday, FirstGroup was fined £75,000 after passengers were stuck on a train in London for more than three hours.
JP Morgan stayed neutral on National Express, down 0.6p at 274.2p, after the company's recent rally.
Asos dropped 482p to £48.80 ahead of a trading update this week, as Morgan Stanley moved from equal weight to underweight on the online fashion retailer.
United Utilities
Severn Trent
Aggreko
Lloyds Banking Group
Randgold Resources
Glencore Xstrata
Debenhams
Go-Ahead
Stagecoach
FirstGroup
National Express
Asos
Nick Fletcher
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