Bets are on a Rock solid performance

BANKS dazzled the market in 2000 and outperformed it by a further 15% in 2001. Attracted by the sector's safe-haven appeal and falling interest rates, fund managers happily filled their boots.

But what lies in store for the sector this year? Top broker Merrill Lynch believes valuations are hardly aggressive at 11 times 2003 earnings and expects 10% upside from present levels against a return from the UK market of 7%.

The next big hurdle for the banks is the annual results season, which Northern Rock (13 1/2p higher at 673 1/2p) kicks off on Wednesday. Institutional clients were jockeying for position ahead of the statement with Merrill expecting Northern to report a strong operating performance in the third quarter of 2001.

Merrill's core stocks are Royal Bank of Scotland - results due on 28 February - which closed 22p higher at 1756p, Barclays - 14 February - 4p better at 2204p and Abbey National - 21 February - 18 1/2p at 1079p. Lloyds TSB rose 12p to 742 1/2p ahead of its results due on 15 February.

Considering the intense speculation surrounding Alliance & Leicester and a possible cash bid from Abbey National, Merrill raised eyebrows by advising clients to take profits. It sees better value elsewhere. Very brave. A&L, which reports full year figures on 22 February, lost 4p to 867 1/2p.

Hedge fund manager Man Group goes from strength to strength. It touched 1370p before closing 24p higher at 1350p amid speculation that a major acquisition is on the cards.

Oil majors gushed in sympathy with a firmer crude price after Iran, Opec's second largest producer, said it may consider a fifth output cut in 14 months to boost prices. As Brent crude for February delivery rose 50 cents to $19.71, BP advanced 18 1/2p to 532p and Shell 16 1/2p to 467p.

Big banks and oils dragged the Footsie 51.8 higher before it closed 31.4 points up at 5,180.6. An undecided Wall Street was 29 up then 32 down in early stages following several 'satisfactory' fourth-quarter trading statements. Many US traders were holding fire ahead of today's speech to the Senate Banking Committee by Fed chairman Alan Greenspan.

Drug stocks put their weight behind the Footsie gain too, after Merrill advised clients to switch out of IT into pharmaceuticals. GlaxoSmith Kline rose 40p to 1780p and Astra Zeneca 48p to 3214p.

Beleaguered Marconi caused quite a stir, falling sharply to 23 1/2p before closing 5p down at 26p on turnover of £118m. Aggressive selling was accompanied by rumours that Marconi was locked in prolonged talks with its bankers after big investors had kicked into touch the idea of a £1bn rights issue to shore up the balance sheet.

New chief executive Mike Parton vowed to drive net debt, which peaked last year at £4.4bn, below £3.2bn by March.

Financial information giant Reuters dropped 33p to 575p after broker Morgan Stanley Dean Witter predicted flat earnings growth over four years. It slashed its forecast for 2002-2005 by 10%, reflecting a loss of market share in computerised financial information and poor performance of Instinet, its share trading business.

Buying on recovery hopes ahead of the results on February 7 left Danka Business Services 3 1/4p up at 31 1/2p.

Red lights flashed at Trafficmaster as the shares reversed off a cliff to finish 17p down at 32 1/2p. The ailing road congestion information company wheeled out yet another profits warning. Revenues for 2001 are expected to be below consensus estimates at £31.5m. The pretax loss will be around £16.4m before write-offs. Trafficmaster is now worth £42m - 18 months ago it was valued at £1bn-plus.

Aim-listed Thomson Intermedia lost 4p to 21p after warning results for the year ending this month will be 15% below expectations. Market conditions have remained difficult.

Classic FM owner GWR dropped 17 1/2p to 232 1/2p. Revenues in the December quarter were 8.4% down on last year. Capital Radio was sold down to 670p after the agm heard that quarterly radio revenue was 9% down.