Market Report: HSBC higher on hopes of Chinese growth

HSBC gained ground last night after a leading broker highlighted the group's "unique" position in the all-important Chinese banking market, which is set for strong growth in the years ahead.

Goldman Sachs said Chinese banking industry earnings could grow nine-fold between 2008 and 2050. At the same time, foreign banks are forecast to gradually increase their share of the market. Putting the two together implies heady profits for the likes of HSBC, which, along with Standard Chartered, has "moved effectively to capture this opportunity with leading local branch networks".

"The vast majority of future Chinese banking earnings will be generated by local banks, making partnerships key for foreign operators," the broker explained, highlighting the fact that HSBC had taken substantial stakes in two mainland lenders. It also stands to benefit indirectly from its stake in Hang Seng Bank, which separately operates the fourth largest foreign branch network in China, and holds stakes in two Chinese banks.

"We expect [Chinese] banking earnings to contribute 40 per cent of HSBC's long-term growth and eventually comprise one-third of group earnings," the broker said, moving the stock, which closed nearly 3 per cent, or 18p, higher at 656p, to "buy". Standard Chartered – rated "buy" at Goldman – was also firm, rising by 2.1 per cent, or 29p, to 1,390p.

In the wider sector, Barclays lagged behind, easing to 346.55p, down 0.5p, while Lloyds gained 1.9 per cent, or 1.76p, to 96.76p, and the Royal Bank of Scotland rose to 46.18p, up 2.9 per cent, or 1.29p.

Overall, the market tried, but failed, to recover fully from the session before, with the FTSE 100, which closed 1.5 per cent lower on Monday, rising by 40.77 points to 4,685.78 and the mid-cap FTSE 250 index rising by 80.39 points to 8,354.48.

Parts of the mining sector enjoyed a steady session, with traders buying in on recent weakness. The Eurasian Natural Resources Corporation led the way, rising to 777p, up 2.4 per cent, or 18.5p, while Xstrata gained 2.2 per cent, or 16p, to 758p, and Kazakhmys rose by 1.9 per cent, or 16.5p, to 880p.

Elsewhere, the commercial property sector was mixed, with some stocks falling back as the profit-taking trend persisted. British Land, down 2.7 per cent, or 13.2p, at 483p, posted quarterly results, with takeover rumours subsiding after the company said it had received approaches for its Broadgate office complex in London. Blackstone, the American private group, was rumoured to be leading the field, with reports indicating that it was close to acquiring a stake in the development.

In the wider sector, Liberty International, which was upgraded to "neutral" at Bank of America-Merrill Lynch, was broadly flat at 472.5p, up 0.1p, while Land Securities, the target price for which was upped to 550p from 435p by the same broker, eased marginally to 607.5p, down 2.5p. Merrill also switched its stance on British Land, moving the stock to "neutral" from "underperform".

Further afield, on the FTSE 250, ITV rose by 1.6 per cent, or 0.76p, to 47.05p amid hopes that it may reclaim a berth among the blue chips next month. UBS said there was a "slim possibility" that the group may move up at the time of the next quarterly review in September, although much hinged on the weakness of the others vying for a place in the blue-chip index.

The broker said Pennon and Foreign & Colonial Investment Trust would need to remain weak and leave the index, while Logica and Tate & Lyle, both of whom are currently in line for a promotion from the FTSE 250, would need to fall further than ITV in the coming weeks.

"We believe the probability of ITV entering the [FTSE 100] is slim but would clearly add technical support to the stock," UBS said. At the close, Pennon was 2.7p ahead at 439.6p, while Foreign & Colonial ended 0.9p higher at 233.9p. Logica was 0.6p ahead at 112.6p. Tate & Lyle was 1p behind at 390.6p.

Regus, the office space provider, was held back, closing flat at 78p, after Panmure Gordon switched its stance to "hold" from "buy", citing the recent strength in the shares, which have been inching closer to its 81p target price. "While we believe in the longer term structural growth of the industry, with Regus well placed as a global leader, we would be tempted to lock in some short-term profitability with the shares up nearly 20 per cent in absolute terms during the past month," the broker said.

Panmure also weighed in on Arc International, which closed 1.6 per cent, or 0.25p, ahead at 15.75p after Virage Logic, the chip technology group, announced a 16.25p per share recommended cash-offer for the company. "We think the price is low, but a higher level will depend on whether the likes of ARM and Imagination are really bothered," the broker said, anticipating an offer price of 20-25p if the others get involved.

"They will undoubtedly be giving this a closer look", Panmure added, raising its target for the stock to 16.25p, compared to 10p previously. The broker maintains a "hold" recommendation on the shares.