LONDON (Reuters) - Gains by bank and mining stocks helped lift the benchmark share index on Thursday, although investors said worries over the euro zone could limit further moves higher and favour more defensive sectors such as food or health stocks.
The blue-chip FTSE 100 index, which fell 1.6 percent on Wednesday to a three-week low, recovered slightly to close up 0.2 percent, or 11.33 points higher, at 5,779.42 points.
Traders said talk of new central bank stimulus measures from the likes of China or the Bank of England was preventing equity markets from sliding on worries over the global economic slowdown and the euro zone sovereign debt crisis.
A revision of second-quarter GDP (gross domestic product) data showed the UK economy contracted less than forecast, but most economists expect the Bank of England to extend a programme of quantitative easing to help the economy.
Financial and mining stocks, which carry the most weight on the FTSE, also benefited from talk that China, which injected a net $58 billion into money markets and is the world’s biggest metals consumer, might take new steps to boost its economy.
Gains on bank stocks such as HSBC and Barclays, and on miners such as Rio Tinto and Anglo American, added the most points to the FTSE 100.
“I’ve bought some of the miners, such as Lonmin. The price of copper is still strong, and there’s expectation of more stimulus measures from China, which would help the miners,” said Hartmann Capital trader Basil Petrides.
However, Petrides was spurning bank stocks for now and felt the market remained vulnerable to more sell-offs.
“I’m trying to steer clear of the banks at the moment, there’s too much volatility in them. I think there’s probably more downside to come on the market,” he said.
FTSE SEEN IN TIGHT NEAR-TERM RANGE
Technical charts painted a mixed picture on the FTSE 100, with traders seeing the market remaining in a range from 5,600-5,800 while uncertainty remains over the euro zone crisis, with Spain under pressure for a bailout and Greece struggling to meet the terms of its rescue package.
Petrides said that if the FTSE ended Friday above the 5,800 level, it could push on to reach 5,865 points.
However, Securequity sales trader Jawaid Afsar saw further declines on the FTSE 100 potentially pushing it down to the 5,600 mark.
Nevertheless, several investors said money was still flowing into equity markets, away from cash or bonds, since the central banks’ injection of liquidity had pushed benchmark bond and cash yields to such historically low levels.
Traditionally “defensive” equity sectors, such as food, healthcare or utility stocks which are less dependent on the economic growth cycle, offer better yields than cash or bonds via their dividends.
According to Thomson Reuters Starmine data, the FTSE 350 index currently has an average dividend yield of 3.5 percent - above yields of around 1.7 percent on UK 10-year government gilts.
“Bonds are yielding around 1.5 percent while cash yields are at 0.5 percent, so relative to that, the equity market looks pretty interesting,” said Franklin Templeton fund manager Colin Morton, whose UK equity income fund is up around 10 percent so far this year.
Morton said he was sticking with weighting his portfolio towards healthcare, utilities and tobacco stocks.
“Regardless of the index levels, we think there are opportunities out there,” he said.
Reporting by Sudip Kar-Gupta