Market Report: Northumbrian climbs on bid talk and Budget cheer

Northumbrian Water gained ground as investors bought in on a combination of bid talk and Budget implications last night.

Speculators touted rumours of bid interest from the Middle East, while Deutsche Bank said the upcoming hike in VAT was a boon for water and energy companies as it is likely to feed through to inflation via the retail prices index (RPI), which in turn should drive up regulated asset values.

"The revised government forecasts for RPI look extremely attractive for the regulated companies," the broker said, aiding Northumbrian's rise to 304.3p, up 4.3p. "While consumer price inflation stabilises at 2 per cent per annum, RPI is expected to remain over 3 per cent for every year out to 2015...

"We believe that this would imply asset base and earnings growth for the UK water and energy networks in excess of what is currently reflected in share prices or consensus estimates."

Deutsche Bank did acknowledge that the benefits may be slightly offset by reductions in capital allowances for investment plants and machinery, and this may lead to increases in cash tax payments. That said, "regulated networks should see this reflected in regulatory allowances at future price reviews". Among other water stocks, Severn Trent was flat at 1,230p, while Pennon was slightly behind at the close, easing by 0.3p to 547.5p. In the wider utilities sector, Drax, the owner of the Drax coal fired power station, was 2p behind at 375.7p against the backdrop of Evolution Securities reiterating its "add" view on the stock.

Overall, stocks failed to make any headway, with the FTSE 100 easing by 68.46 points to 5,178.52 and the FTSE 250 closing at 9,833.16, down 105.57.

Worries about the US economy acted as a dampener on sentiment, with traders expressing concern about uninspiring data on the American housing market.

On the domestic front, the minutes of the last Bank of England monetary policy meeting revealed the first call for higher interest rates since August 2008. One MPC member, Andrew Sentance, called for a rise to 0.75 per cent, but few in the market expect the other policymakers to side with him until the end of this year, or early 2011.

In the banking sector, Lloyds rose by as much as 4.8 per before falling back with the wider market and ending 0.3 down at 58.7p after Citigroup said it was the "clear winner" from the new banking levy and the proposed reduction in corporation tax. Indeed, instead of depressing forecasts, earnings for 2012 could rise by around 2 per cent, against an estimated negative impact of just under 1 per cent for others.

UBS also weighed in on the issue, suggesting that while the sector's normalised earnings for 2012 could be hit by as much as 12 per cent, it expected the actual impact to be lower as banks restructure, deleverage and otherwise manage their balance sheets. In other movements, Royal Bank of Scotland went from a high of 48.62p to 46.72p, down 0.36p, at the close, while Barclays closed at 300.8p, down 9.95p, against a session best of 311.4p.

Miners, similarly, were hit by worries about the US. Vedanta Resources, the target for which was cut to 4,238p at Morgan Stanley, and the Eurasian Natural Resources Corporation, the target for which was cut to 1,252p by the same broker, fell by 33p to 2,385p and by 19p to 1,011p respectively. Xstrata lost 30p to 1,018p and Kazakhmys fell by 27p to 1,169p after Morgan Stanley scaled back its targets for the two to 1,571p and 1,768p respectively.

Rio Tinto, down 55p at 3,390p, and BHP Billiton, down 37p at 1,951p, were among those that were in focus following mid-afternoon news from Australia, where the prime minister, Kevin Rudd, called a leadership ballot in the face of moves to replace to him with deputy Julia Gillard. Mr Rudd is a proponent of the planned tax on mining sector profits.

Elsewhere, St James's Place was 9.4p behind at 215.6p despite Panmure Gordon, considering the impact of the Budget, labelling it the "biggest beneficiary" in the UK life insurance sector.

"Key positives are pension tax relief, capital gains tax not biting as hard as first anticipated and confirmation of the previously flagged abolition of compulsory annuitisation at 75 years," the broker said, repeating its "buy" view on the shares.

Further afield, the Chancellor's plans to freeze council tax in areas where spending is reigned in weighed on Southern Cross Healthcare, the care-home operator, which was 1.5p lower at 43p. "This will increase pressure on local authorities to be economic on social care spending, making any elderly care residential fee inflation unlikely in the near to medium term," UBS said, scaling back its target price for the stock to 100p. The broker did, however, stick to its "buy" stance, noting that the group has a recovery strategy in place, which should mitigate the impact.

Dana Petroleum rebounded, adding 6 per cent or 71p to 1,265p as bid rumours, offset by a falling oil price in the previous session, continued to attract speculators. Austria's OMV was once again the name in the frame, though there was no mention of a potential offer price. Dana is a favourite of the speculators and often features in the market rumour mill.