UK FTSE bounces back, boosted by defensive shares, M&A talk

Mon Apr 8, 2013 12:30pm EDT

* FTSE 100 up 0.4 percent at 6,276.94 points

* Defensives lead market up as investors worry about growth

* Investors snap up Vodafone, Weir as cheap bid targets

By Francesco Canepa

LONDON, April 8 (Reuters) - Britain's blue-chip index halted a three-day slide on Monday as buyers took advantage of beaten-down prices to place bets on possible takeover targets and pile into defensive shares.

The FTSE 100 closed up 27.16 points, or 0.4 percent, at 6,276.94 after dropping 1.5 percent on Friday, when much weaker than expected jobs data from the United States sent the FTSE to a two-month low.

The FTSE had cut its losses late on Friday and a rebound on Monday, albeit modest, suggested appetite for shares had not disappeared, thanks to sustained monetary stimulus from central banks across the globe.

"Clients have been waiting for a meaningful pullback where they could buy at some decent levels," Manoj Ladwa, head of trading at TJ Markets, said.

"There could be a little more to go on the downside, but traders are still willing to dip their toes in just in case the market does carry on rallying."

Ladwa said he was "net short" UK blue chips, meaning he had more negative than positive positions, but he cautioned he had set automatic buying orders, or stop losses, just above current levels, fearing further gains.

Among stocks he had been buying were food retailers Tesco and Sainsbury, up 1.4 percent and 0.7 percent, seen as defensive options if demand for superfluous goods were to fall due to worsening economic conditions.

He also bought mobile operator Vodafone, which had fallen 5 percent over the previous three sessions, as it offers reliable earnings and is seen as the possible target of a bid from U.S. partner Verizon.

Vodafone and food retailers were among the biggest contributors to the FTSE's rise, adding around 23 points.

Bid speculation also boosted oil equipment maker Weir , which rose 4.2 percent on news General Electric is buying oilfield pump maker Lufkin Industries Inc at a 38 percent premium to Lufkin's closing price on Friday.

Traders said Weir was itself seen as a possible bid target, leading investors to cover their negative positions on the stock, the third most-shorted on the FTSE 100, according to Markit data as of the close on April 5.

VALUATION LURE

Russia-based precious metal miner Polymetal, which trades at one of the lowest valuation multiples among UK blue chips, rose 5.3 percent to the top of the FTSE on Monday after unveiling a 30 payout on its 2012 net profit.

The broader mining sector, which has fallen 13 percent so far this year compared with a 6.4 percent rise on the broader index, rose 0.8 percent as investors bought back into some of the most battered names, such as Eurasian Natural Resources Corporation (ENRC).

ENRC's stock, which Citigroup upgraded to "neutral" from "sell" on valuation grounds on Monday, rose 1.7 percent in volume twice its 90-day average.

Trading at 9.6 times their expected earnings for the next twelve months, mining shares were among the cheapest in Britain, along with oil & gas, Thomson Reuters data showed.

The broader FTSE index was trading on a 11.4 earnings multiple, the highest since 2010, after rallying 16.6 percent between November and mid-March, boosted by monetary stimulus from global central banks.

"From a liquidity point of view we see continued support (but) valuation is becoming more of a concern," Johan Jooste, chief market strategist for Europe, the Middle East and Africa at Merrill Lynch Wealth Management, said. (Reporting By Francesco Canepa, Editing by Andy Bruce)

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