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IAG and banks recover as FTSE 100 struggles to hold on to early gains

Banks are leading the way after the recent rout, but another big riser is International Consolidated Airlines Group.

The company, formed from the merger of British Airways and Iberia, is up 3.7p to 145.3p after it approved BA’s acquisition of six daily slots at London Heathrow from bmi. The slots will be used from late October and will allow BA to expand both longhaul and shorthaul flights at the airport.

IAG, which is widely expected to take part in further consolidation of the airline industry, has moved ahead despite analysts at HSBC cutting their target price from 335p to 240p. But HSBC is still positive on the business:

Given the weaker macro outlook, we cut our demand and yield estimates for European airlines. A key factor is probably how capacity adjusts to meet forecast slowing demand. But stocks have also been very weak and valuations are at historical lows. Despite the uncertainty we think many of these stocks look good value. Of the network carriers, IAG (overweight) has the highest potential return.

As for the banks, Lloyds Banking Group is up 1.05p at 33.56p while Barclays is 1.8p better at 140.65p.

Elsewhere Centrica has climbed 5.5p to 288.1p after it paid 0m in cash for Texas-based energy retailer First Choice Power.

Inmarsat, the subject of much speculation about private equity interest, recovered 8.9p to 472p in the wake of Thursday’s share purchase by director Eugene Jilg and an overweight recommendation from HSBC analysts. They said:

Upcoming newsflow – potential statement from the Federal Communications Commission regarding [US partner] LightSquared, share buyback program, Sprint analyst meeting regarding [an LTE network] – [could] act as a catalyst for the shares.

Overall the FTSE 100 has drifted back from its highs, and is now up 23.03 points at 5064.64. Dominic Rossi at Fidelity Worldwide Investment said:

At times like these, it can be difficult for investors to know what to do. Markets have reacted badly to the Fed’s policy statement and European sovereign debt issues continue to rumble on.

We should expect news over the next few weeks to deteriorate further. As we go into the earnings season shortly, there will be more missed forecasts and guidance from companies will be uncertain and gloomy. For investors, valuations will come in to play at some stage. Yields will be well covered because balance sheets are strong.

It is clear now that the Fed cannot bail equity markets out any more and any interest rate cuts by the ECB may not have much of an impact on markets. The solution on the fiscal front will be either Greek default or Germany accepting that it has to fund debt restructuring and so reduce the quantity of debt in Greece. This will be a prototype for other European countries.

Investors should remember the strong get stronger. We will see M&A pick up in Europe. There is little capital around and so the threat for companies from new competition is disappearing. Markets will have to consolidate so that oligopolies or duopolies are created and the remaining companies have strong cash flow and don’t have to rely on the debt markets. This is a carbon copy of what happened in emerging markets 15 years ago. Equity will shrink as well-financed companies grow by acquiring others and buy back their own equity. In time, this will stabilise equities. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds