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Money Marketing Markets: Rights issues coming to a head

The FTSE slipped below the 6,000 barrier this week for the first time in seven weeks with the oil price continuing to drive much of the movement in the market.

Chris Hyde, manager of the Baring UK growth fund, says only a quarter of FTSE companies have outperformed the benchmark this year, the lowest level since 1990. This indicates just how concentrated performance has been, with last years’ call of being overweight oil and miners and underweight banks and consumer-facing stocks still holding true.

“If you relate the oil price to the FTSE Allshare, the index peaked on May 19 and the oil price peaked a couple of days later,” he says.

Hyde points out that it was commodity stocks that led the market down in the early part of the week as prices dipped, until a $5 spike in crude overnight on Thursday saw oil and mining stocks rally on Friday, dragging the FTSE back through the 6,000 in the morning before news that the US unemployment rate grew at its fastest rate in 22 years brought the market crashing back down to 5,981.

“The oil price is what a lot of people are focusing on and is a big call,” says James Henderson, manager of the Lowland investment company. “When it goes down interest rate sensitive stocks and big users of oil are getting support and the reverse is true when it rises.”

BP and Shell were big risers on Friday, up 1.3 per cent and 1.5 per cent, respectively, while dollar weakness also drove metal prices higher, pushing up Xstrata and BHP Billiton.

British Airways was the day’s biggest loser down 5.9 per cent, while mid cap EasyJet fell by 4.1 per cent despite reporting a 16 per cent rise in passenger volumes.

Hyde holds EasyJet, which he says acts as an oil hedge, and with several airlines going out of business driving capacity out of European short haul flights, the company is well-positioned to take advantage when crude comes back.

Henderson favours British Airways, which he says has a strong management team and has been unduly punished for the terminal five fiasco, given the company’s margins.

Fiascos have a habit of denting confidence in management teams and Bradford & Bingley has been a case in point this week.

The bank took another hammering after restructuring its rights issue on Monday (the one it denied needing a month ago). This followed the announcement that private equity firm TPG Capital is to pump in £179m, but is significantly buying in at 55p, 40 per cent lower than the originally touted price.

“I was sat here open-mouthed when I watched the events unfold,” says Guy Bowles, managing director of Ingenious Asset Management. “I have never seen a rights issue being underwritten and then the underwriters let off the hook. And to cap it all off, the management says it is in the best interests of the company. The management’s credibility has been shot to pieces.”

B&B’s share price has fallen by 82 per cent over the past 12 months and the announcement of an £8m loss and rising defaults in its mortgage book is making it look vulnerable.

“B&B will not remain independent for very long. The private equity firm will want to see a return on its investment and there is no confidence in the management. Potential buyers will want to feel we are near the bottom of the market first, but after the rights issue B&B will be well-capitalised and be bought by the end of the year,” Bowles says.

Royal Bank of Scotland’s rights issue got away altogether more smoothly this week, sparking a 10 per cent rally in the shares over the week.
“RBS has been strong this week and it is often the case with rights issues that people are positioning themselves to ensure they have enough cash to take up the new shares,” says Henderson. “The feeling now is that the majority of people will take-up the rights issue.”

He says the majority is mainly held by institutions whereas HBOS, which is set for a £4bn cash call next month, has an army of small investors from when Halifax demutualised.

“It will cost them a lot to send the paperwork through but they have the systems in place to deal with this,” adds Bowles.

Jitters from the B&B deal have still seen HBOS sink by more than 12 per cent this week, however.

Elsewhere, the lack of an interest rate cut added to Persimmon’s woes this week. The company, the UK’s biggest housebuilder, looks almost certain to be ousted from the top flight in the FTSE’s next quarterly rebalancing to be replaced by Invensys.

“We are favouring value stocks and are looking at gaining exposure to housebuilders when the time is right,” Hyde says. “However, housing transactions are going down and the value of land is in danger of being written off, which makes me feel that a lot of housebuilders will have to do rights issues.”

Henderson is also on a watching brief, pointing to Bellway’s better than expected results this week.

So, value investors are watching the market like hawks but calling the bottom for some of these battered sectors will take some nerve.


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