UK stocks edge higher, led by pharma sector

Fri Jan 11, 2013 4:59am EST

* FTSE 100 up 0.1 percent, clings on to 6,100 level

* Drugs stocks helped by UBS strategy upgrade

* IAG, Aviva lifted by broker rating changes

* Miners weak as Chinese inflation picks up

By Jon Hopkins

LONDON, Jan 11 (Reuters) - Britain's top share index edged higher on Friday, adding to a strong run since the start of the year, with gains in heavyweight pharmaceutical stocks providing the main support.

At 0917 GMT, the FTSE 100 index was up 1.86 points, or 0.1 percent at 6,103.37, having closed above 6,100 for the first time since May 22, 2008 on Thursday.

"I think the current rally will come to an end over the next couple of months. Stock prices are quite overvalued given that revenues continue to be poor and the outlook for 2013 for large parts of the world is slowing growth, or in the case of the euro zone, negative growth. (Although) In the shorter term, January is likely to remain positive for equities," Craig Erlam, market strategist at Alpari (UK) said.

Gains by heavyweight drug stocks lent the main strength to the UK blue chips, helped by an upgrade for the heathcare sector to "overweight" from "neutral" by UBS in a UK strategy review, following a 12 percent underperformance since July, with AstraZeneca and Shire its preferred picks.

"We switch our preferred defensive play to the healthcare sector, and downgrade utilities and aerospace & defence to neutral," UBS said in a note.

Broker comment also boosted IAG, the top FTSE 100 gainer, up 3.7 percent. Traders cited the impact of an upgrade by UBS to "buy" from "neutral" for the owner of British Airways and Iberia, mainly on valuation grounds.

"Despite its share price being up over 25 percent in 2012, IAG was 'the worst performing European airline share under our coverage', underperforming Lufthansa by over 30 percent and Air France KLM by circa 45 percent. We think that IAG could be the laggard most likely to outperform in 2013," UBS said in a note.

Insurer Aviva was also in demand, up 2.3 percent after Citigroup upgraded it to "buy" from "neutral".

"We think Aviva is one of the most attractive opportunities in the sector this year. Despite recent gains, Aviva trades at a substantial discount to UK peers ... and European composites. Most importantly we see a number of catalysts from management actions to close this gap in the next two years," Citigroup said.

Weakness in miners was the biggest drag on the blue chips as a pick-up in Chinese inflation data dented recent optimism over demand from the world's top consumer of metals.

"The rollercoaster ride for data from China continues to drive the heavyweight mining sector, with today's inflation news a disappointment, although the main focus will be on China GDP numbers next week and the prospects for the main engine of global growth," Mike Mason, senior trader at Sucden Financial Private Clients said.

Tullow Oil was the biggest FTSE 100 faller, down 4.7 percent as Europe's biggest independent oil and gas explorer issued a mixed trading statement.

"Small miss on FY12 production but 2013 sees a return to a much a busier E&A (exploration and appraisal) programme," Oriel Securities said in a note, reiterating its "add" stance on Tullow Oil.

UK stocks showed no reaction to data showing British industrial output grew less than expected in November, despite a strong rebound in oil and gas production, with the numbers adding to evidence that the economy may have contracted in the last three months of 2012. (Editing by Nigel Stephenson)

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