Oils, defensives lift FTSE; S&P cuts hit banks

LONDON -

The FTSE 100 rose on Monday in choppy trade as gains in oils and defensives outpaced falls in banks, after Standard & Poors ratings agency cut its credit ratings for nine euro zone countries.

London's blue chip index <.FTSE> was up 10.51 points, or 0.2 percent at 5,647.15 by 0853 GMT, in light volumes. Traders said that S&P's downgrades were well flagged, and with some losses already incurred on Friday, investors had time to position themselves ahead of the announcement.

The downgrades included France and left investors worried the euro zone's bailout fund EFSF might lose its AAA rating with S&P, reducing its ability to help countries in distress. Meanwhile, negotiations between Greece and private creditors on a debt swap deal broke down, raising the risk of a messy Greek default.

UBS said the downgrades could have been worse with France only losing one notch on its rating, while Germany emerged unscathed with its triple-A rating and a stable outlook.

Jimmy Yates, head of equities at CMC Markets, said: "The downgrades were well flagged but Greece's slide towards default leaves serious question marks over the ratings for some of the banks, given their exposure to the region."

Banks <.FTNMX8350> were the hardest hit sector with Royal Bank of Scotland and Lloyds Banking Group down 0.9 percent and 1.9 percent, respectively.

Espirito Santo said despite the sector's cheapness -- the european banking index <.SX7E> trades at 0.6 times tangible net asset value -- and central banks flooding the market with cheap cash, it is too early to be outright bulls on the sector.

"The core problem of sovereign insolvency has not been addressed ... (and) we must negotiate years of deleveraging before we can hope to see the sector's earnings move up positively," the broker says.

Espirito favours the investment banks due to a lower-than-expected impact on revenues and profits from deleveraging going forward, with UK-listed Barclays among its top picks.

The biggest single faller on the FTSE 100 was Carnival , the owner of the cruise ship that capsized off Italy's west coast. The company's shares dropped 17.6 percent after it estimated the impact to 2012 earnings for loss of use alone to be around $90 million.

Traders said Natixis and Morgan Stanley both cut their ratings for the cruise operator.

Kingfisher , Europe's biggest home improvements retailer, shed 1.5 percent as Citigroup downgrades the firm to "neutral" from "buy."

OIL UP

Integrated oils <.FTNMX0530>, which have taken on defensive characteristics -- reliable dividends, earnings growth, strong balance sheets -- as the outlook for the global economy has darkened, were higher.

The sector rose with the price of oil, which gained on supply worries after Iran warned Gulf Arab neighbours of consequences if they raised oil output to replace Iranian barrels facing international sanctions.

Higher oil prices translate into higher margins for energy groups.

Royal Dutch Shell added 1.2 percent, while BG Group rose 1 percent as Cheuvreux upped its rating to selected list from "outperform."

Oil services firm Amec added 1 percent as Goldman Sachs upgraded its rating to "buy" from "neutral," citing its attractive relative valuation and the potential for an accretive use of cash on the balance sheet.

The same broker, however, downgraded peer Wood Group , down 0.8 percent, to "neutral" on valuation grounds.

Britain's Smiths Group , whose products range from bomb detectors to medical devices and fuel hoses, rose 1 percent as UBS upped its target price to 1,300 pence from 1,200 pence and repeated its "buy" rating.

"As growth returns and the enhanced margins are maintained or increased, we expect investors and potential buyers of the divisions to ascribe a higher multiple to Smiths' future earnings," the broker said.

UBS also upgraded Aircraft parts supplier Meggitt , up 1.1 percent, to "buy" from "neutral" on valuation grounds, with the stock trading on 9.0 times 2012 EV/EBITA.

Morrison Supermarkets edged 0.2 percent higher after recent falls on the back of its recent Christmas trading update, as Deutsche Bank upgraded the food retailer to "buy" from "neutral" saying price war fears, emanating from peer Tesco's profit warning, were overdone.

Still on the defensive theme, drugmaker Shire rose 0.8 percent after UBS raised its target price, while peer GlaxoSmithKline was up 0.8 percent.

The UK market was rudderless with no important economic data due for release, while U.S. equity markets will be closed on Monday due to a holiday.

(Reporting by David Brett; Additional reporting by Jon Hopkins; Editing by Jon Loades-Carter)