Britain's top share index hit a 2-1/2-month closing high on Monday, as strong manufacturing data in China lifted miners and on hopes that plans to end the eurozone debt crisis will be announced at a summit this week. Miners rose 5.6 percent, contributing 34 points to the UK benchmark, as China's manufacturing sector showed expansion for the first time in three months, easing worries of an abrupt slowdown in the world's second-largest economy and top metal consumer.
Miners Kazakhmys, Lonmin, Antofagasta and Rio Tinto were the top four gainers, up between 7.1 and 8 percent. Expectations that eurozone leaders will announce a comprehensive plan to tackle the two-year-old debt crisis at Wednesday's summit also boosted the index. However, some traders said the market was running ahead of the news and that any disappointment would lead to a sharp sell-off. "The market is no more than going to a casino," Securequity trader Jawaid Afsar said, adding that he was keeping a "neutral" position.
The FTSE 100 ended up 59.41 points, or 1.1 percent, at 5,548.06 in relatively light volume after rising 1.9 percent in the previous session. Despite the rally on Monday, UK miners are still down 26.5 percent in the year to date, hurt by the weakening global growth outlook.
Michael O'Sullivan, director of global asset allocation at Credit Suisse Private Banking, said miners were cheap and that his bank was "overweight" on the sector, which would be benefited by more merger and acquisition activity. "Supply is constrained, so to be able to buy supply is important. Lots of the big mining companies have a lot of cash to undertake acquisitions," O'Sullivan said.
But he said the sector's performance would also depend on the situation in Europe and China's financial sector, which investors are concerned is saddled with problem loans after Beijing's stimulus drive after the collapse of Lehman Brothers in 2008. Of the FTSE 100 stocks, Vedanta Resources carry the cheapest valuation relative to earnings, with a 12-month forward price-to-earnings multiple of 3.4, followed by Kazakhmy's 4.4 and Rio Tinto's 5.3, data from Thomson Reuters Datastream showed. UK banks advanced 2.5 percent on Monday, outpacing a 1.3 percent rise in eurozone banks, as policymakers in the currency bloc worked on a wider solution to the debt crisis ahead of Wednesday's deadline.
Evolution Securities analyst Ian Gordon said investors should recognise that UK banks substantially share Nordic banks' defensive qualities against a European sector that is preparing to drown in new equity issuance. Lloyds Banking Group climbed 5.3 percent. The part-nationalised bank said on Sunday that a flotation of 630 branches, which it has been ordered to dispose by regulators, remained an option, along with a sale of the branches.
The FTSE 100 has so far fared better than peers in continental Europe this year, down 6 percent, as British companies are seen to be less affected by the two-year-old sovereign debt crisis. Germany's DAX has shed 12.4 percent. "We have been more bullish on the UK slightly, relative to Europe. That has worked. But we are obviously aware that if you do get a positive surprise from the politicians, that will start to unwind," said Nick Nelson, European equity strategist at UBS.
FTSE 100 companies are expected to post average year-on-year earnings growth of 16.2 percent for 2011 and 10.8 percent for 2012, against a decline of 1.5 percent for DAX firms this year and a 9.4 percent increase next year, Thomson Reuters I/B/E/S data showed.
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