Market Report: JP Morgan casts a shadow over RSA bid talk

JP Morgan has called time on Royal & SunAlliance's soaraway share price. The insurer's market value has gained 50 per cent in the year to date but cautious comments from the US broker left the stock 3.25p lower to 113.5p yesterday.

One reason for RSA's impressive performance over the past 12 months is the persistent takeover rumours that have surrounded the company. In June, the financier Andrew ¬ toyed with the idea of making a move on the company through his Corvus investment vehicle.

But JP Morgan is sceptical that a serious offer will emerge for the company any time soon. It believes that a predator will wait for RSA to exit it troublesome US business. And this, according to the broker, is going to take some time. It expects the insurer to start discussions with the US regulator about ring-fencing the division's liabilities in the middle of 2006 and warned that these negotiations could take up to a year to complete.

Hence JP Morgan downgraded it stance on RSA to "neutral" from "overweight" and urged investors to switch into Aviva and France's Axa.

The FTSE 100 suffered a 67.8-point drop to 5,423.2, as a retreat by the heavyweight banking and oil sectors took its toll on the blue-chip index. Despite yesterday's sharp drop, the FTSE 100 still finished the month 2 per cent higher.

But Morgan Stanley is far from upbeat about the year ahead. The US broker said: "We are relatively cautious on equities for 2006." It believes UK companies will struggle to grow earnings significantly as the global economy slows, and it predicted the FTSE 100 will make little progress over the next 12 months. Given this overview, Morgan Stanley urged investors to buy into "non-cyclical" growth companies and companies with high dividend yields.

ITV, off 0.5p to 108.5p, was a talking point. Dealers said Brandes Investment Partners, a US value fund, had been busy adding to its stake in the broadcaster, an investment which at the last count stood at 5.1 per cent. Compass lost 5.75p to 211p on reports the catering giant has been subpoenaed by an arm of the US Justice Department. Credit Suisse First Boston did Compass no favours as it downgraded the stock to "underperform" from "neutral". The Swiss broker lowered its earnings forecasts for Compass by an average of 4 per cent per annum for the 2006-2008 period and told investors a bid for the whole group is unlikely, given this uncertainty over earnings at the company.

Elsewhere, City punters were once again scouring the market in search of the next takeover. Cookson improved 4p to 384p amid hopes that a US conglomerate is about to swoop on the engineer. Rumours that the management of Stagecoach is preparing to make a 150p-a-share bid for the transport group pushed its shares 2.5p higher to 118p.

House of Fraser rose 3p to a six-month high of 116p. The share-price move once again sparked rumours of a bid for the company. Meanwhile, Game Group fell 0.75p to 73.75p as Nick Bubb, the retail analyst at Evolution Securities, argued that it is too soon for Game's US rival Gameshop to make an offer for the company. It was this hope that supported Game's shares on Tuesday despite a major profits warning from the company. Mr Bubb urged punters not to hold their breath, pointing out that it will be some time before Gameshop is ready to make a major deal, given the company's recent purchase of its domestic peer Electronic Boutique.

A plethora of analyst upgrades drove Charter 27p higher to 495p. Among them was Oliver Wynne-James at Panmure Gordon. He raised his forecasts for the engineer significantly for the next three years and, despite the sixteen-fold jump in the shares since the start of 2003, argued that it is not too late for investors to pile in.

At the small-cap end of the market, Service Power, steady at 35p, boasted of a contract win with Argos Direct. And there was similar news from Innovation Group, unchanged at 27.5p, as the software provider unveiled a licensing deal worth £1.75m. Investec Securities applauded the news and said the deal will add visibility to the company's earnings.

Finally, Lavendon rose 3.5p to 200p after Steel Partners, the US investment fund run by the Wall Street legend Warren Lichtenstein, raised its stake in the tool-hire group to 7.4 per cent.

Steel Partners has made a name for itself as an activist investor in the US. It tends to build up significant stakes in underperforming, old-economy companies and once it has a big enough foothold, it then pushes for a shake-up. In the UK, Steel Partners has sizeable shareholdings in the chain maker Renold, the packaging group API, and Delta, the chemicals firm.