Goldman Sachs goes cold on LSE

Mickey Clark
21 Oct 2009

Timing is everything in the stock market, which is why Goldman Sachs has removed shares in the London Stock Exchange from its influential Conviction Buy list and downgraded their rating to neutral.

Since Goldman first tipped the shares and at the start of June, they have risen 26% compared with the FTSE World Europe index which has risen 23%.

In the past year, LSE shares have risen 69% compared with 36% for the index. The broker says its current target for the shares of 1000p implies only 7% scope for improvement, with better value to be had elsewhere.

Over the same period, rival exchange Deutsche Börse fell 0.6% while the Bolsas y Mercados Españoles — the Spanish Stock Exchange which has outlets in Barcelona, Madrid, Bilbao and Valencia — was down 4.1%. Goldman reckons that in the few months since becoming LSE chief executive, Xavier Rolet has shown a clear understanding of the challenges and opportunities faced by LSE. Buying MillenniumIT gives the exchange a clearly defined technology strategy, albeit with an unhelpful lag in implementation.

“Despite this progress, investors continue to focus on market share attrition in UK equities. However, we believe that the impact of this has been more than offset by index gains in the year to date. We also expect re-equitisation will continue to grow the total size of the pie,” the broker says.

It calculates the loss of market share has impaired LSE's value by between 1.6% and 2.9%. But there is clear evidence that the LSE is steadily losing share of the London market to trading platforms such as Chi-X and Tourquoise. The LSE share price responded to Goldman's downgrade with a fall of 24p to 910½p, making it one of the market's biggest blue-chip casualties.

That compares with its peak of almost 2000p several years ago when the LSE was busy fending off takeover bids.

A bumper set of third-quarter numbers from Deutsche Bank gave London and other European markets an early boost. The bank came in with profits of €1.4 billion (£1.3 billion), which easily beat a consensus forecast of €881 million. But the early momentum was soon lost with FTSE 100 index losing 56.72 points at 5186.68.
Banks remained a dull market in the wake of yesterday's big shares sale by the Qataris in Barclays, which slipped another 4.6p to 359.1p. Persistent talks that Lloyds Banking Group may be close to launching another cash call on shareholders left its shares nursing a fall of 1.2p at 90p, while the other state-controlled bank Royal Bank of Scotland eased 1.2p at 45.3p. Sentiment was also dented by the Bank of England Governor, Mervyn King, calling for tighter regulation of the banks. He said there needs to be a fundamental re-think of how the banks are structured.

Tesco rose 7¼p to 390¾p, and clearly still has its fans. Nomura continues to rate the shares a buy and has jacked up its target from 405p to 526p. It claims management will in effect create a new company over the next five years, generating sales of £27.3 billion a year and profits of £2.65 billion.

Wolseley led the Foostie 100 companies higher with a rise of 36p to 1450p. Bank of America Merrill Lynch has raised its rating on the world's biggest supplier of plumbing equipment from neutral to buy. It is convinced Wolseley will return to “sustainable growth” during the next year.

The speculators' favourite Gulf Keystone Petroleum fell 11¼p to 113¼p, after touching 96p. Its Hungarian partner MOL says it is too early to say whether the findings at the Shaikan block in northern Iraq will be suitable for sale. Gulf Keystone, which has an 80% stake in the field, has already estimated the reserves at between 1.5 billion and 3 billion barrels. Burford Capital started trading on AIM after placing at 100p. Shares in the corporate litigation specialist opened at 107½p.