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Money Marketing Markets: ‘Screaming buys or trouble ahead?’

Banks and commodity companies were once again the main focus of attention this week.

Royal Bank of Scotland slumped to an eight year low of 2313/4p on Thursday amid ongoing concerns about its mammoth £12bn rights issue.

Institutional investors and the company’s army of 174,000 small investors have until Tuesday to decide whether they take up the new stock at the offer price of 200p a share. RBS has seen its share price slide by almost a third since the announcement at the end of April.

Colin McLean, managing director of SVM Asset Management believes concerns that the stock will not be taken up and will be left with the investment banks supporting the deal are overblown.

He says: “RBS has sold off a lot more than the other banks and is starting to look attractive if there are no more write-downs. We are seeing the share price move a lot closer to the 200p mark but I believe institutions will take up the new shares.”

McLean says hedge funds are likely to be among the buyers, taking the opportunity to cover their short positions in the sector cost-effectively.

Gary Reynolds, chief investment officer at Courtiers, points out that RBS is trading on a p/e ratio of 4.5, compared to 6.64 for the sector and 11.7 for the FTSE 100.

“The rights issue is necessary because RBS needs to continue driving its business forward but it has been very heavily punished and looks a screaming buy at this level,” he says.

After edging down all week, RBS recovered by 2.59 per cent on Friday to 236p as banks led the FTSE 100 up 40 points to pass through the 6,100 barrier at 6,107.4 in mid-afternoon trading.

McLean notes the mortgage banks, staged an intra-day recovery on Friday as HBOS recovered from an early 0.9 per cent fall to be down just 0.06 per cent. The mortgage banks had been spooked on a negative report from a Moody’s report that warned UK lenders will continue to struggle with writedowns for the next 18 months.

“There is a lot of noise out there but the banks were able to shrug this off because at these levels they are close to capitulation,” Reynolds adds.

Commodity stocks continued to struggle on Friday as the oil price dipped to $125 a barrel, over $10 off its recent record highs. BP and Shell both slipped on the news while BG was the hardest hit amid concerns that it will be dragged into a bidding war after Australia’s Origin Energy knocked back its $13bn bid.

“It is no surprise we have seen a very short-term pull back in the oil price given the pace of the move we have seen and it may have blown off some of the speculation on the price,” McLean adds.

Stenham’s John Long remains positive on the outlook for black gold, however.
He says: “There has been a lot of speculation but we believe the oil price will remain quite elevated because of the supply and demand dynamics.”

Elsewhere, retailers recovered strongly on Friday after slipping on Thursday’s dour Nationwide house price survey. The lender said the average house price fell by 2.5 per cent in May, the largest monthly fall since it began its survey back in 1991.

Marks & Spencer, up 1.8 per cent, Next, up 2.36 per cent and Home Retail Group, up 2.62 per cent all rebounded sharply on Friday.

“Housing is a big issue and if the market crashes then consumer spending will hit the wall but here there is probably an element of relief that the news was not as bad as feared,” Reynolds says.

The Consumer does look set to come under further pressure in the coming months, however, as Scottish & Southern Energy, the UK’s second largest electricity provider, warned people to brace themselves for further price hikes this year.

“The utilities are able to pass on their higher input costs to consumers but there can be a lag affect,” says McLean.

He is positive on the sector and holds British Energy, which is at the centre of a £7bn bidding war. Its profits short-circuited this year, down 32 per cent after it was forced to run with a number of its ageing power stations running below capacity.

Bid speculation also buoyed the insurers earlier in the week. Long says: “It is a complicated sector but a lot of its recent problems have now been worked through, which is fuelling a lot of takeover speculation.”

How much of this bears fruit remains to be seen but in flat markets, there is nothing like a bit of speculation to get stocks flying off the shelves.

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