Market Report: BHP Billiton bucks weak market trend

BHP Billiton managed to stay afloat despite weakness in the wider market last night, as Investec weighed in, moving its recommendation on the stock to "buy" from "hold".

Following months of outperformance, commodities and mining equities were starting to look "overbought", the broker said, highlighting recent weakness in FTSE 350 mining index, which is down sharply over the last month.

"The correction has, however, provided some buying opportunities," Investec said, turning positive on BHP, which was 8p firmer at 1308p, and Rio Tinto, which eased to 1895.5p, down 24.5p. "For other companies, we are not yet confident enough to call the bottom," the broker added, expressing caution about those, like Anglo American, who have a significant exposure to the South African rand. Anglo, like Rio, fell in line with the wider market, losing 64p to 1563p.

Citigroup also issued a sector review, saying that while it anticipated a "short-term pull back in [commodity] prices as restocking in China comes to an end and imports slow", the outlook for next year and beyond was improving and it expected higher prices in 2010/11.

Overall, the FTSE 100 fell to 4140.23, down 1.1 per cent or 46.77 points, and the FTSE 250 retreated to 7196.81, down 1.7 per cent or 121.7 points, as the general appetite for risk waned amid thin volumes.

Banking stocks, including the Royal Bank of Scotland, down 4.5 per cent or 1.66p at 35.65p, Barclays, down 3 per cent or 9p at 287p, and Lloyds, down 3.5 per cent or 2.29p at 63.71p, traded lower as the Chancellor of the Exchequer, Alistair Darling, announced plans to toughen up the regulatory system.

Insurance issues were the weakest, with Aviva falling to 303p, down 8.5 per cent or 28p, amid rumours that the company might move to cut its dividend when it posts interim results next month. In the wider sector, Legal & General retreated to 49.78p, down 8.7 per cent or 4.72p, while Prudential eased to 370p, down 6.3 per cent or 25p.

Elsewhere, BAE Systems managed to close broadly unchanged, down 1p at 329.75p, thanks to some words of support from Credit Suisse, which reiterated it's "outperform" rating on the defense group's stock.

"The stock has been weak, driven by investor concerns that defense spending is in structural decline, but we see both positive near-term catalysts and longer-term growth drivers," the broker said, adding the BAE has also "significantly underperformed its US peers this year and now trades at a 27 per cent discount to Lockheed Martin".

Over on the second tier, the house builder Redrow was 0.75p weaker at 212.5p ahead of its trading update, which is due this morning. The stock managed to stay afloat despite some negative comment from Panmure Gordon, which reiterated its "sell" stance, telling clients that the valuation weighed against shares.

"Redrow is now trading at a premium to our trough NAV [net asset value] forecast and, given that we forecast losses over the next few years and no dividend, we would take this opportunity to sell the shares," the broker said, adding that as far as the update was concerned, and given weak comparatives, the group should report improved volumes, particularly on a per site basis.

Great Portland Estates, the Central London-focused commercial property group, was also the subject of some negative broker comment, as UBS reiterated its "sell" advice with a revised 200p target price, compared to 265p previously

"Notwithstanding signs of increased investment activity, we remain cautious as to the timing and strength of a Central London office recovery," the broker said. "We think that Central London offices will remain subdued at least until 2011, and that capital values will fall until March 2010 on average. We believe that some properties in the group's existing portfolio might prove particularly vulnerable."

Numis weighed in on Mitchells & Butlers, the pubs group which retreated to 239.25p, down 2.8 per cent or 7p, after the broker switched its stance to "hold" from "add".

"Without an equity fundraising, we are forecasting earnings per share to fall by 32 per cent this year, with minimal growth thereafter," Numis said. "With the share price close to the NAV of 265p, slow debt reduction and no dividend for at least 18 months, it is difficult to envisage a positive catalyst."

Also on the downside, Mondi, the paper and packaging group, closed at 197p, down 1.5 per cent or 3p, following news that the company was mothballing its PM32 paper machine. This represents a 120,000-tonne capacity reduction per annum, putting a number of staff at risk. The stock was also the focus of a bullish circular from Bank of America–Merrill Lynch, which upgraded its stance on the stock to "neutral" on diminished balance sheet risk.

"Longer term, we like Mondi's lower cost, developing market asset base, which provides competitive long-term advantages," the broker said. "We still have concerns related to excess capacity in Mondi's key markets."