Pharmaceutical stocks, racked by new drug failures and tough operating conditions, dragged Britain's FTSE-100 off of 28-month peaks on Thursday, but investor faith in a nascent fourth-quarter rally showed through in media stocks and mid-cap retailers.
The blue-chip index closed down 7.6 points to 4,698.7 after touching a session low of 4,686. Earlier in the day, it hit a 28-month high then reversed itself in morning trade. It is still up around 130 points in the course of a one-week rally that started at the beginning of a new quarter.
Reflecting greater confidence in the UK market's immediate potential, Deutsche Bank lifted its year-end target for the benchmark index to 5,000 points.
"I think we are right in thinking there is underlying strength," said Peter Bodycombe, a fund manager at Singer & Friedlander Investment management. "People are nervous about specific stocks like pharmaceuticals."
GlaxoSmithKline posted a 4 percent decline, leading the sector lower as pharmaceutical companies knocked more than 16 points off the FTSE 100.
Fund managers said sentiment surrounding the industry was poisoned by the recall by US drug giant Merck of painkiller Vioxx, the most prominent in a string of new drug failures, a disappointing business update from AstraZeneca on Wednesday and a warning from the AstraZeneca chief executive that the industry was facing a margin squeeze and had to rethink its production of drugs.
AstraZeneca was 2.5 percent lower after touching a 17-month low following a flood of downgrades from analysts after the business update, which included news of a year's delay to a diabetes drug.
Glaxo outperformed has AstraZeneca by around 20 percent since the latter's Exanta anti-coagulant was rejected in September by a panel of US experts. But dealers said investors were keen to take money out of the stock, which underperformed on Thursday on concerns about the potential cost of executive options.
Shire Pharmaceuticals lost 2.5 percent, while mid-cap Acambis lost 4 percent and SkyePharma lost 6 percent.
Although heavily weighted oil shares, rising on steadily climbing oil prices over the past week, have lent support to the FTSE as it rallied, BP posted a 0.4 percent decline and Shell pared earlier gains even as crude futures hit a new record of $53 a barrel on concerns of tight supplies during the winter and news of an oil strike in Nigeria.
John Hatherly, head of global analysis at M&G Investment Management, said that investors were slow to ramp up the oil-price assumptions backing their view on the shares, fearing that current levels are merely a spike.
"If you ask investors what price of oil is being factored into BP shares, the answer is probably around $30," Hatherly said. "Somehow people just don't believe that (high oil prices are) sustainable."
With energy supplies tightening, however, oil exploration companies such as Cairn Energy outperformed the market with a 2 percent gain. Paladin Resources was a top gainer among broadly higher midcap stocks after Merrill Lynch upgraded it to "buy", citing, in part, a reinvigorated exploration programme.
In a sign that the rally is set to continue, media stocks - normally volatile and prone to outperform a rising market, were in the ascendant, with BSkyB leading the FTSE gainers' table with a 3.7 percent rise. ITV rose 1.7 percent, while advertiser WPP rose 2.1 percent.
Bodycombe said investors, looking for ways to profit from stiff competition among mobile operators to the detriment of their stock price, were looking for gains in media and advertising, anticipating the operators will raise ad spending to defend their positions.
"In this phase of low-burn economic expansion, people will fight hard for their market share and this is one of the ways they are prepared to do this," he said.
Mining stocks also helped counter weakness in other sectors as copper prices scaled 10-year peaks, pushing other metals higher.
With takeover activity a major driver behind recent UK market gains, midcap sporting goods store chain JJB, which announced it had a bid approach last week, rose 6.2 percent, while discount clothing retailer Matalan rose 5.7 percent to 239-3/4 pence as bid speculation resurfaced in that stock. However, a spokeswoman for Tesco, tipped as a potential buyer, said "we have a successful clothing business of our own."
"With trade buyers rumoured, we would see 270p as a base valuation for the business. If trade buyers do not emerge, then the business will still possess its cash-generative qualities and therefore will always be attractive to a private equity buyer," Iain McDonald, analyst at Numis Securities, said of Matalan.
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