The Weekly Highs & Lows Market Report: Irish uncertainty triggers surge in defensive stocks

Uncertainty over the potential timing and scale of a bail-out of the Irish economy by its European neighbours continued to dominate markets at home and abroad this week. London’s FTSE 100 reached 5831 points on Monday but went on to slide through the week, only climbing again Thursday when it emerged that a multi-billion Euro Irish bail-out was a “when, not if” issue. More clarification on Ireland also lifted US and Asian markets later in the week.


Meanwhile, Fed chairman Ben Bernanke boosted spirits with a broadside at critics of US monetary policy and an attack on what he saw as Chinese efforts to undervalue the yuan. Adding insult to injury, though, the Chinese dampened the mood with news that regulators were moving to control inflation by increasing capital ratio requirements for the country’s banks.

In London, the FTSE 100 index dipped again on Friday, trading down 50 points to 5,717 at lunch. Elsewhere, the FTSE 250 and AIM markets put in similarly uninspiring performances. It was a week in which big corporate news was thin on the ground but, despite this, 65 London-listed stocks hit 12-month highs – similar to last week but with fewer lows (just 15).

Austerity strikes again

Heading up the new lows list in market cap terms this week was Britain's largest public sector outsourcing group, Capita Group (LON:CPI). It fell to 660p after it indicated that sales would suffer more from austerity measures than previously expected. The company was one of 19 suppliers that met with the government in July to discuss how they could reduce the cost of their government outsourcing services. It suggested then that this could “affect growth in the short term” in some areas but, this week, Capita said that revenue growth would be modest because many existing contracts would not be renewed or offset with new deals. The news raised doubts over earlier predictions that support services firms would be winners from the new Coalition government on the basis that spending cuts would deliver opportunities for some major pieces of outsourcing.

Finding safety amongst defensives

While the major indices struggled as oil, mining and financial large caps took a breather, the money flowed into defensive sectors with stocks in the beverages, food and pharma sectors all posting new highs.

Diageo (LON:DGE) and Sabmiller (LON:SAB) broke out as fund managers sought multinationals with strong emerging market exposure and a whole slew of Industrial Engineers graced the new highs list. Engineering company, Weir Group acquired American Hydro Corp on Thursday and names such as Imi (LON:IMI) , Melrose (LON:MRO) , Fenner Plc(LON:FENR) and Pursuit Dynamics (LON:PDX) were in strong demand by still underexposed investors, making the sector one of the best performers on the market in the year to date.

Juniors shine amongst resource plays

While the broader oil and mining sectors struggled, British North Sea explorer and producer Premier Oil (LON:PMO) performed admirably following speculation over a potential bid from KNOC in the Sunday press Amec Plc (LON:AMEC)  also did well, but the hot money continued to chase after the junior exploration plays. Eight of the top 10 new high gainers this week were gold, coal, diamond and oil explorers.

The most active share on Thursday this week was Range Resources (LON:RRL) with a massive 165m shares traded while it surged 19% to a new high. The company reported that 68 structures had been identified as potential reservoirs across its licences in Georgia and independent best estimates showed potential across the structures for discoveries of up to 2bn barrels of oil. Xcite Energy (LON:XEL). continuing its run, now up almost 400% year to date, reported Wednesday that it had entered a binding letter of intent with BAOL to use the Rowan Norway – a deep water jack up rig – on their Bentley field when it becomes available. First stage production is planned for Q4 2011.

Private investor favourite Red Rock Resources (LON:RRR) stated that it had started drilling at the Migori gold project in Kenya. The company is expected to report soon and anticipation is high with the company's shares up another 21% this week to make 700% year to date.

Flying low

A new name on the lows list was Sutton Harbour Hldgs (LON:SUH), a Plymouth based business which operates Plymouth City Airport, Sutton Harbour Marina, and Sutton Harbour Fisheries. The company announced back in September that it was disposing its ill-fated airline venture, Air Southwest, to Eastern International Airlines after suffering ongoing losses. Air Southwest had called on the OFT to investigate claimed predation by Flybe aimed at eliminating Air Southwest as a competitor, but last week, it was announced that no action was to be taken by the OFT on the basis of insufficient evidence.

Britain’s Next Top Model

In many ways SuperGroup (LON:SGP), the fashion label loved by celebrities such as David Beckham, has been the float of the year, with fund managers treating it as the must own stock of the moment. A 186% performance to date has brought it a £1.2bn market cap and a steady position on the new highs list but with a p/e ratio of 32x or more, there seems little margin for error.