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Tesco climbs as Buffett raises stake while FTSE ends higher in another turbulent day

US billionaire and investment guru Warren Buffett may be having problems with a falling share price at his Berkshire Hathaway business, but he is still on the hunt for a bargain.

At the end of August he spent around £120m to buy 34m shares in Tesco, taking his stake in the UK supermarket from 3.21% to 3.64%. Buffett – who has authorised a buyback programme to support Berkshire Hathaway – had previously said Tesco should take a hard look at its loss-making US business Fresh & Easy, but analysts said this latest share purchase could be seen as a vote of confidence in new chief executive Phil Clarke.

Tesco, which launched its £500m price promotion on Monday, added 6.2p to 371.4p. Commenting on the initiative Panmure Gordon’s Philip Dorgan said:

We think that the Tesco initiative is off to a decent start. We have only visited one store and Tesco has to replicate over hundreds of stores for hundreds of days for its price investment to generate the benefits it hopes for. Nevertheless, we think that the store looked good, the offers were striking and it will force the industry to rethink its promotional package. We remain buyers of Tesco and think that the greatest level of pain will be felt outside the UK quoted sector (with the exception of Ocado).

The other food retailers will look carefully at what Tesco has done and then they will react according to their own particular trading strategies. Some will price match, some will not. But whatever happens, the sector’s profit and loss account will need further managing. We think that this can be done at Morrison and, perhaps, at Sainsbury. So we could actually see the Big Three quoted retailers only marginally miss consensus.

Overall it was another uneasy day for investors, as they tried to weigh up the prospects for a solution to the Eurozone crisis. Hopes that a plan to tackle Greece’s problems would finalliy be agreed, following weekend statements from the IMF meeting – including a boost to the European bailout fund to take it to €3trn – gave an initial lift to markets. But a reminder of the global slowdown in the form of falling US house sales took some of the shine off. The FTSE 100 traded in a near 175 point range before finally closing 22.56 points higher at 5089.37. As usual traders heard a host of rumours, ranging from a rate cut next week from the European Central Bank to French state aid for its banking system. Angus Campbell, head of sales at Capital Spreads, said:

The FTSE saw another bout of high volatility and lack of direction today as investors attempted to weigh up whether these levels present a decent buying opportunity following the week end’s IMF meeting. One thing that did come out of last week end was a sense of urgency and that political leaders are finally coming to terms with the severity of the situation.

However, the financial markets have been crying out for such coordinated acknowledgement from politicians for a long time now and there is still concern that this major wake up to call has come too late. It may be some time, weeks if not months, before any of the ideas being batted around are put into action and in the meantime confidence is only going to continue slowly eroding away. As the third quarter draws to a close investors will have to prepare themselves for more nerve jangling times ahead.

Banks benefited from talk of a co-ordinated plan to tackle the crisis, with Barclays 10p better at 156p and Royal Bank of Scotland rising 0.74p to 23.57p. But Bruce Packard at Seymour Pierce struck a cautious note:

UK banks’ exposure to Greece is minimal, for instance the most exposed Royal Bank of Scotland recorded an impairment charge of £733m versus £1.45bn notional Greek government bonds (ie 50% haircut). The problem is analysing secondary and tertiary effects – for instance the counter party risk to UK banks from other, more exposed Eurozone banks, or the potential for other countries such as Ireland, Italy or Spain to follow suit and also default. Banks are trading well below our target prices, but we are not confident on how to discount events given the total assets for the UK banking sector are measured in trillions of pounds, it seems unlikely UK banks can avoid the fallout.

Insurers were also in demand. Aviva added 17.7p to 295p following a positive note from analysts at Investec, who said:

The recent slip in the share price has seen our forecast dividend offer a 9.7% yield which, despite the challenging economic backdrop, we feel is unjustified and offers a buying opportunity.

But mining shares fell back on worries about slowing demand if the global economy suffers another severe downturn. Kazakhmys closed 32p lower at 782p and Vedanta Resources fell 43p to £10.70. With gold and silver slumping again as investors cashed in their gains to cover losses elsewhere, precious metal specialists were also under pressure. Fresnillo fell 112p to £15.24 and Randgold Resources lost 180p to £61.70. African Barrick Gold led the mid-cap losers, down 69.5p at 500p.

Morgan Crucible Company dipped 1.4p to 230p despite vague speculation the industrial materials group could attract a 450p a share offer. Arcelor Mittal was one name mentioned by traders.

But Smiths Group added 10p to 922p as Investec began coverage of the technology group with a buy recommendation and £11 price target. Investec said:

We see the prospect of the much discussed break-up as closer following management’s comments on portfolio management at the June capital markets event and we expect speculation on a disposal programme to provide some support to the share price in challenging markets. Short-term macro headwinds may well slow any sale process, but, in our view, strong fundamentals and the current valuation support our positive stance.

Reed Elsevier rose 10.7p to 497.3p as the Anglo Dutch group beefed up its data business by buying US specialist Accuity for £343m in cash.

Lower down the market mining minnow Stratex International added 0.125p to 7.875p after Antofagasta invested £800,000 to take a 2.97% stake.

Finally Flying Brands – which warned last week it could breach its banking covenants in October – has agreed to sell some of its property assets for £2.1m. It will use the cash to pay off its existing term loan of £1.7m from its bank and the rest for working capital. Its shares ended 2p higher at 13.5p. © 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