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It’s time once again to begin Shares’ popular annual Full FTSE review, looking at every single stock of the main market. Over the coming month our sector specialists will assess each constituent of the FTSE 100, Mid 250, Small Cap and Fledgling indices, and for every share there are key numbers and a snapshot summary as well as a note of last year’s view, so you can see whether we have become more positive or negative on a share. In addition, the takeover-potential rating shows how likely we think a bid is. On top of all this, the market sector summaries offer a view of the bigger picture. To start the ball rolling, Dan Coatsworth looks at the choppy market waters in the wake of a turbulent 2007.

THE PERFORMANCE

There are two ways of looking at the headline index performance for 2007. An optimist would plump for the statistic that shows the robust nature of the FTSE 100. At the year close, the blue-chip index was a mere 6.8% off its record high of 6930.2, seen in December 1999. A pessimist would point out that the FTSE 100 only grew 3.8% in 2007, the worst performance since 2002.

On balance, to record any growth in one of the worst sessions since the dot.com crash has to be an achievement. Share prices were annihilated by the credit crunch, sub-prime mortgage fallout and fragile capital markets. Around £4.6 billion was wiped off the value of FTSE 100 constituent Northern Rock (NRK), causing huge damage to the index. The knock-on effect of uncertain economic conditions was felt across numerous sectors, including recruitment, within support services, leisure and retail.

Against this torrid backdrop there were still winners. Around half of the industry sectors outperformed the FTSE All Share on the year. Mining, the star performer, beat the market by 45% in another record period for commodity prices. A sharp rise in global energy consumption and continued investment in Asian infrastructure has created a vibrant market.

Oil & gas also contributed to the FTSE’s strength, outperforming the market by 13%. Investment bank Dresdner Kleinwort believes the resource sectors are among the few less at risk from a recession in the US and UK.

Don’t be tempted to seek opportunities at the other end of the spectrum by buying into 2007’s worst-performing sectors on the hope of a recovery, warns the investment bank. It advises: ‘Resist the temptation to buy into banks, house builders and real estate. The sectors that lead us into bubbles are never the first to lead the market out.’

Real estate underperformed the market by 36%, retail by 21% and banks by nearly 17%. Higher interest rates, a slowdown in consumer spending and sub-prime lending woes drove down shares. Despite action by the Bank of England to ease money markets and revive economic growth, analysts don’t believe these sectors will be revived overnight.

Defensive stocks lived up to their name and displayed resilience as market conditions worsened. Tobacco outperformed the FTSE All Share by 28.9%, represented by a mere two companies – British American Tobacco (BATS) and Imperial Tobacco (IMT) – with Gallaher having been delisted in April following its takeover by Japan Tobacco. The companies have grown volumes and become more profit-conscious by cutting costs. Food retailers such as Tesco (TSCO) and Morrison (MRW) performed well, as did the utilities.

Banking stocks, which account for 16.7% of the FTSE 100 by weighting, lost their defensive qualities on the Northern Rock shambles. Industry experts are divided over the prospects for the sector in 2008.

Stockbroker Killik echoes Shares’ own view on Barclays (BARC) – one of our Hot Stocks for 2008 – by picking the bank as one of its tips for the year ahead, saying it reported record trading profits in the second half of last year. ‘We believe the fear factor regarding sub-prime will ease in 2008 and the shares will enjoy a relief rally,’ says head of equities Graham Neale.

In contrast, investment bank Credit Suisse expects Royal Bank of Scotland (RBS) to be among the main stocks to underperform this year. ‘Its exposure to the US (increasingly delinquencies, US dollar weakness) and global markets (risks of mark-down, revenue weakness) makes it a prime candidate for potential earnings downgrades should the economy slow more than expected by market participants,’ says the bank.

The term ‘recession’ is frequently being used by economists. Although their attention is currently focused on the US, high levels of household debt in the UK and doubts over whether the Bank of England can resuscitate the money markets fast enough could also pave the way for the ‘R’ word in our economy. Perhaps a good time to buy bonds, suggests JP Morgan Asset Management, which believes the UK is the most attractive fixed-income market.

Volatile trading conditions are certainly ahead, but it would be unwise to abandon share dealing. The FTSE 100 predominantly features defensive stocks. Aside from banking and pharmaceuticals – which have suffered while trying to secure pipelines of new drug developments – the index should be a solid and safe place to invest. That is, of course, depending on earnings forecasts being correct and individual stock problems not dragging down their sector peers.

A fortnight ago, we listed key trading strategies for 2008 (see Get the Biggest bang for your Buck – 4 January – in the Shares online archive www.sharesmagazine.com) and many apply to the FTSE 100. Buy big cap stocks with easily tradable assets. Snap up defensive stocks with low earnings volatility. Pick stocks with net cash. Avoid companies in cyclical industries and high earnings volatility. Stay clear of property groups.

The individual stock commentary on the entire FTSE 100 from the Shares team should guide you in the right direction. More than ever, it is important to pick the right stocks rather than a broad sweep across particular sectors.

FTSE 100: ITS MAKE-UP AFTER THE SHAKE-UP

As the dust clears after a turbulent 2007, Simon Keane gains some perspective on the market as it enters 2008, and finds the old, pre-sub-prime order largely intact

It was billed as the biggest FTSE 100 shake-up since the technology bubble burst in 2000. A total of seven companies were ejected from the UK’s index of leading shares at index compiler FTSE Group’s annual review on 12 December.

But to say this was akin to the kind of shake-up seen in 2000 is missing the point of an index. Yes, the number of companies ejected may have been very high, but what we saw was a lot of borderline FTSE 100 companies kicked out, no giants fell.

The term ‘borderline’ is used with reference to the weighting of these companies in the overall index. The sensitivity of the FTSE 100 to each company depends on its market capitalisation, meaning even sharp price movements among minor constituents cause little more than ripples on the FTSE 100 pond.

The top 20 companies, or mega-caps, account for 68% of the overall index in terms of weighting, and not a single company that wasn’t in this top 20 last year is missing from the list this year. These companies (banks included) were never in danger of being booted out of the FTSE 100.

Indeed much has been made of the demise of the banking sector and in particular the ejection of Northern Rock (NRK). But in the bigger picture Northern Rock was only ever a bit player on a stage dominated by international giants such as HSBC (HSBA) or Royal Bank of Scotland (RBS). Before its troubles, Northern’s market capitalisation was £5 billion, that is about a twentieth of the size of HSBC, which is currently valued at £98 billion.

This is not comparable with what was going on at the time of the technology bubble when we saw giants such as Marconi (market cap of close to £28 billion just prior to the bubble bursting) ripped to pieces. Yes, compared with this time last year, we are looking at a different FTSE 100, but only subtly different.

The continuing commodities boom has seen the resources companies become more dominant still. BG Group (BG.) and Rio Tinto (RIO) are now in the top ten, they replace Barclays (BARC) and HBOS (HBOS), which are ranked 13th and 16th respectively. But, while bruised by the sub-prime crisis, these banks are far from knocked out.

It remains the case that the banks are big fish in the FTSE 100 pond, HSBC and Royal Bank of Scotland account for 9.3% of the index. The Oil & Gas companies still command the heights, with Royal Dutch Shell (RDSB) (A and B shares combined although they are treated separately by FTSE) accounting for 9% of the index followed by BP (BP.) in second place with an 8% chunk.

Mining companies Rio Tinto (RIO) and Anglo American (AAL) flex their muscles with a combined weighting of 6%. Things have changed since last year but not as much as some media reports would lead you to believe. We have yet to see a real change in the dynamic of the UK stock market.

SHARES' SECTOR RATINGS FOR 2008

AEROSPACE & DEFENCE 7

Will the boom continue? Last year the aerospace and defence sub-sector rose around 15%. We are in the middle of an extremely strong upturn with massive orders for new jets stretching ahead five years. Depending on currency fluctuations UK companies could raise profits by around 10% this year lifting share prices by a similar amount. Boeing looks well placed as the falling dollar boosts its margins but Airbus says it could lose money as the euro has rocketed. Airbus might force its suppliers to cut prices. (TD)

AUTOMOBILES & PARTS 5

Demand from the US and Europe will be under pressure amid recession concerns. Last year car sales were good in both markets but, with concerns about credit and tighter lending, fewer cars will be bought. That said, share prices have already tanked, so some worries may already be priced in. (CS)

BANKS 5

The sector endured a torrid time last year as UK banks reaped the whirlwind sowed in the US. The massive sell off has left share prices looking cheap, on historically low PE ratios and with very high yields. The full costs of the sub-prime crisis are yet to be extrapolated but with careful selection it may be possible to benefit from a partial recovery. (TS)

BEVERAGES 6

The demand for wines and spirits should continue to grow. The sector will be wary of currency movements which will affect the sterling price of wines and also the sterling value of overseas profits. Demand for beer in the UK is falling. However, Scottish & Newcastle (SCTN) could disappear and SABMiller (SAB) does not sell beer in the UK. (JM)

CHEMICALS 5

The sector put in another good performance in 2007, despite continued weakness of the dollar, which is set to persist in 2008. Dutch Akzo Nobel’s acquisition of ICI took the big player out of the market, leaving Johnson Matthey (JMAT) as the next major takeover target. Some smaller businesses are also worth keeping an eye on. (RR)

CONSTRUCTION & MATERIALS 6

Companies with a spread of development activities should be protected from a residential housing downturn, so long as they focus on picking the right projects. Be wary of materials firms with an exposure to housing, but after this diverse sector’s lagging performance last year some bargains have been left behind. Interest rate cuts will provide support. (CS)

ELECTRICITY 8

Steadily growing hunger for renewables will keep enthusiasm high for green-focused companies. In addition, the government’s decision to back nuclear plants should open new opportunities even for companies that aren’t involved in nuclear. After performing well last year, the sector should grow further, with some companies seen as quality growth investments. (CS)

ELECTRONIC & ELECTRICAL EQUIPMENT 6

Many in the sector, which lagged the All-Share by 12% last year, rely on the uncertain outcome of the US recession riddle, and are still under pressure from Asian competitors. However, margin-focused firms with low relative PEs should outperform, as should any company in the green energy sector. (CS)

ENGINEERING 5

Most engineering companies underperformed last year with around a 10% fall in share prices. Those that bucked the trend were supplying ‘hot’ sectors like oil & gas and mining, and selling to fast growth countries like China and India.

This trend looks like continuing this year with the UK and US likely to see little growth and Europe to slow down. Generally those closest to the consumer, such as Invensys (ISYS) – with its domestic heating controls division – look likely to underperform, unless they are bid for, while those supplying sophisticated equipment, including Goodwin (GDWN) and Gooch & Housego (GHH:AIM), could do well. (TD)

FIXED-LINE TELECOMMUNICATIONS 7

Started last year well but finished it badly, hampered by poor performance from BT (BT.A), whose IT solutions arm undershot expectations. Brutal competition between telcos, cable and satellite firms will keep the pressure on in 2008, though BT’s 6%-plus yield should offer support and consolidation among the smaller players remains likely. (RM)

FOOD & DRUG RETAILERS 6

This is a classic defensive sector dominated by three companies. It should succeed in outperforming the market as Tesco,the dominant company, is enjoying strong growth overseas and Morrison will be subject to takeover rumours with Sir Ken’s reign about to end. The key issue facing the sector will be food price inflation. (JM)

FOOD PRODUCERS 5

All the companies will be faced with rising raw material costs. The medium-sized, own-label producers may have difficulty passing these on. There is unlikely to be significant corporate activity as both ABF (ABF) and Unilever (ULVR) are bid proof. Some medium-sized companies, however, may merge. (JM)

FORESTRY & PAPER 2

Dominated by Mondi, the FTSE 350 forestry and paper index is simply indicative of this single stock’s price movement. Since being demerged from Anglo American (AAL) in mid 2007, Mondi has struggled to claw back lost territory after the shares plummeted in the summer market crash. Rising costs are the industry’s biggest issue. (DC)

GAS, WATER & MULTI-UTILITIES 7

It shouldn’t be too late to buy into a sector that many already expect to outperform this year, due to its constituents’ stable cash flows. Rising gas prices and strong interest from private equity should mean the sector will continue to do well. Investment in infrastructure could also trigger earnings upgrades. (CS)

GENERAL FINANCIAL 5

They’ll be some takeover activity – note rumours around FTSE 250’s Close Brothers (CBG) and Collins Stewart (CLST) – while tightening Aim rules will lead to consolidation among some of the smaller brokers. Alternative asset managers and hedge funds offer upside. Specialist lenders and insolvency companies will see opportunities created by credit crisis. (SK)

GENERAL INDUSTRIALS 3

Not a great performance for the sector in 2007. High raw material costs are having an impact, but there are hopes that a string of new refineries coming onstream this year will stabilise or possibly cut the cost of plastics and petroleum product. (RR)

GENERAL RETAILERS 4

The outlook for consumer spending is not encouraging. This will especially hit sales of big ticket items, such as furniture, and menswear. There will probably be some dividend cuts – DSG International (DSGI) and Kingfisher (KGF) are obvious victims. Likely to be some bankruptcies, although internet sales will motor ahead. (JM)

HEALTHCARE 6

Made a recovery in 2007, up almost 20%. Demand for care services remains high due to aging population and medical advances, giving advantage to companies aimed at elderly and people with disabilities. Care home market remains highly fragmented, providing acquisition opportunities this year. However, the dependence on the current political bias towards outsourcing for care service provision leaves some companies vulnerable. (RR)

HOUSEHOLD GOODS 5

This is a ragbag of a sector consisting of house builders and a cleaning company. The former are suffering from the downturn in consumer confidence. Lower rates may help sentiment. The sector is likely to be dull, at least initially. (JM)

INDUSTRIAL METALS 8

With Corus delisted, the baton is passed to Talvivaara Mining as the sole participant of the FTSE 350 industrial metals index. Since listing in mid-2007, the Finnish company has outperformed the FTSE All-Share by around 7% as it prepares to start zinc mining in April. The shares should do well. (DC)

INDUSTRIAL TRANSPORTATION 4

A pretty dire performance from the sector in 2007, falling around 20%, and it is unlikely to be a strong performer in 2008, with little exciting news. Takeover talks surrounding ferry operator Irish Continental (ICGC) led to disappointment, having dragged on for several months until offer period terminated on 1 November. (RR)

LIFE INSURANCE 7

Last year’s wave of consolidation news, which resulted in Resolution (RSL) being taken private, left some companies weaker. Expect more bid activity, also from foreign companies trying to expand in the attractive UK market. Competitiveness in some areas will weigh on earnings but expansion to emerging economies should offset this. (CS)

MEDIA 4

Times are likely to remain tough for media stocks this year, with advertising woes set to get worse in a jittery economic climate. With many stocks already depressed, however, some fillips could come from M&A activity, with buyouts and consolidation on the cards. (ST)

MINING 9

The best-performing sector of 2007, mining should continue to do well, albeit at a slower pace. Commodity prices still look strong but could be in for their final bull run as the supply deficit starts to narrow. M&A will be the driving force for shares, particularly if the Chinese start to buy majors. (DC)

MOBILE TELECOMMUNICATIONS 8

Vodafone (VOD) chief executive Arun Sarin was fighting for his job barely a year ago but, after a number of disposals and acquisitions, his restructuring plans have begun to bear fruit. The combination of secular growth in emerging markets and continued progress from 3G means mobile telecoms should be a safe haven if the global economy does falter in 2008. (RM)

NONLIFE INSURANCE 6

In the absence of major catastrophes, companies should keep doing well, albeit not as well as last year, when the catastrophe-free environment after Katrina saw them post record results. Many rates have been coming down but might not be at their lowest yet. Bid activity may give some support to share prices. (CS)

OIL & GAS PRODUCERS 8

The new year began with the $100 barrel barrier being breached and the outlook remains relatively bullish for the rest of 2008. There will be challenges ahead – high oil prices bring with them higher associated costs and stoke the fires of resource nationalism – but overall this sector should continue to outperform, with consolidation remaining a factor. (TS)

OIL EQUIPMENT & SERVICES 9

This diverse sector was among the strongest last year, benefiting both from the increased capital expenditure among oil explorers and producers, and from an outbreak of takeover speculation and activity. This trend looks set to continue as companies strive to meet the demands of resurgent national oil companies. (TS)

PERSONAL GOODS 7

The sector is dominated by three companies – SSL International (SSL), Burberry (BRBY) and PZ Cussons (PZC). Although sentiment towards PZ Cussons is affected by its strong commitment to Africa, the prospects for both it and Burberry are strong. That should guarantee that the sector performs well this year.

PHARMACEUTICALS & BIOTECHNOLOGY 6

Last year was a poor one for the sector but, with the economic outlook uncertain, Pharma & Biotech is coming back into favour somewhat as a defensive play. Regulatory issues and generic threats to products still remain a concern, however, but a ‘safe haven’ mentality should provide some support for the shares. (ST)

REAL ESTATE 2

For this sector 2007 was a shocker of a year. Previous expectations about Reits fell flat and the whole sector suffered on the back of the credit crunch and general uncertainty about property market. Forecasts of NAV downgrades and falling UK house prices paint a gloomy picture for 2008, although companies with European exposure and a good development portfolio may feel smaller impact. (RR)

SOFTWARE & COMPUTER SERVICES 5

Underperformed badly in 2007, as hopes for M&A activity never really bore fruit and the market took fright about the sector’s financial services exposure once the credit crunch hit. Any economic slowdown would be a further negative in 2008, especially for IT services stocks, and hopes for performance again lie with sector consolidation. (RM)

SUPPORT SERVICES 4

Always a tough one to summarise because of its wide spread of activities. It struggled in latter part of 2007 as recruitment stocks slumped. Infrastructure consultancies should prop the index up this year but some of the major service groups need to sustain contract momentum to justify their high ratings. Expect choppy times. (DC)

TECHNOLOGY HARDWARE & EQUIPMENT 5

This diverse sector underperformed yet again in 2007, hampered by the weaker US dollar and, given the slow take-up of the Microsoft Vista operating system, the absence of a new killer product. Sterling weakness would be a plus but any slowdown in consumer spending on new gadgets in the event of an economic slowdown would be a real problem. (RM)

TOBACCO 6

This is a classic defensive sector. Both stocks are trading well despite the impact of smoking bans in some developed markets. Unlikely to be any significant corporate activity this year although BAT (BATS) will seek to gain from the Turkish privatisation. Although demand is declining in mature markets sales are still growing overall. (JM)

TRAVEL & LEISURE 3

Heavily exposed to consumer spending patterns, around 17% underperformance against the FTSE All-Share in 2007 doesn’t surprise. Higher interest rates and tighter credit meant consumers had less money for leisure. The smoking ban ate into profits. Gaming companies fought for recovery after the US ban. Unless the UK economy improves, this sector will stay weak. (DC)

COMPANY BY COMPANY GUIDE

AEROSPACE & DEFENCE

by: Timon Day

BAE Systems (BA.) 480p

Market value: £16,900m

PE: 14.4 EPS growth: 13%

Yield: 2.9% 3mth rel str: 2.6%

Takeover potential: 3

BAE had a good 2007. Its shares outperformed the FTSE 100 by almost 14%. Expansion in the US has gone well and lucrative fighter orders have been clinched with Saudi Arabia. A cutback in US defence spending looks likely if Obama becomes President, but profits should rise this year and next.

Shares view: Now HOLD Last Year HOLD

Rolls-Royce (RR.) 511p

Market value: £9,300m

PE: 14.5 EPS growth: 13.6%

Yield: 2.3% 3mth rel str: -1.1%

Takeover potential: 1

Rolls is on a roll selling more and more jet engines to Boeing and Airbus. As long as the dollar does not fall too much more and new acquisitions prove sensible the shares look a firm hold having outperformed the FTSE by almost 16% in 2007.

Shares view: Now HOLD Last Year BUY

Smiths Group (SMIN) £10.15

Market value: £3,900m

PE: 14.0 EPS growth: 9.5%

Yield: 3.75% 3 mth rel str: -0.7%

Takeover potential: 3

It should have been a good year as Smiths sold its aerospace arm to GE for a good price, but it failed to do a joint deal with its security division. The appointment of Philip Bowman as chief executive signals change. This could mean more sales of peripheral activities and expanding the medical equipment and detection arms.

Shares view: Now HOLD Last Year BUY

BANKS

by: Tom Sieber

Alliance & Leicester (AL.) 745p

Market cap: £3,134m

PE: 8.77 EPS growth: 0.23%

Yield: 8% 3 mth rel str: -8.7%

Takeover potential: 5

The high street lender suffered in sympathy with Northern Rock and Last Year the stock plummeted by around 45%. It has rallied on bid hopes in recent weeks but that is now in the share price.

Shares view: Now HOLD Last Year HOLD

Barclays (BARC) 487p

Market cap: £32,147m

PE: 6.68 EPS growth: 5.23%

Yield: 7.53% 3 mth rel str: -22.4%

Takeover potential: 2

The battle with RBS for ABN Amro, that it may have been pleased to lose, was eventually overshadowed by the credit crunch. The range and scope of its business offers insurance against a downturn in the UK economy.

Shares view: Now BUY Last Year HOLD

HBOS (HBOS) 708p

Market cap: £26,393m

PE: 6.52 EPS growth: 2.7%

Yield: 7.14% 3 mth rel str: -23%

Takeover potential: 1

Although less exposed to the credit crisis than some of its peers the UK mortgage market is coming under increasing pressure and since the downfall of Northern Rock HBOS is the market leader in this area.

Shares view: Now SELL Last Year HOLD

HSBC (HSBA) 828p

Market cap: £97,885m

PE: 10.8 EPS growth: 2.49%

Yield: 5.54% 3 mth rel str: -9.3%

Takeover potential: 1

This is at a premium to the sector but does at least carry the advantage of having significant exposure to emerging markets and its sheer size is enough to make it a haven in the current climate.

Shares view: Now HOLD Last Year HOLD

Lloyds TSB (LLOY) 455p

Market cap: £25,697m

PE: 8.21 EPS growth: 8.7%

Yield: 8.23% 3 mth rel str: -16.9%

Takeover potential: 2

The advantage Lloyds has in 2008 is that at a time when there is negative sentiment towards complex financial instruments like SIVs and CDOs its more straightforward approach could pay off. Heavy exposure to the UK might present problems though.

Shares view: Now BUY Last Year HOLD

Royal Bank of Scotland (RBS) 423p

Market cap: £42,351m

PE: 5.96 EPS growth: -1.61%

Yield: 8.59% 3 mth rel str: -21.5%

Takeover potential: 2

It may have slightly overstretched in the pursuit of ABN Amro but the sell off looks to be overdone with pre-tax profits expected to total more than £10 billion this year.

Shares view: Now HOLD Last Year HOLD

Standard Chartered (STAN) £18.02

Market cap: £25,401m

PE: 15.4 EPS growth: 18.8%

Yield: 2.4% 3 mth rel str: 17.6%

Takeover potential: 2

Standard has a vastly different model to the rest of the UK banks and has been favoured for its focus on south-east Asia, but it is comparatively expensive.

Shares view: Now HOLD Last Year HOLD

BEVERAGES

by: John Marshall

Diageo (DGE) £10.79

Market cap:£27,991 million

PE:18.3 EPS growth: 21.5%

Yield:3.1% 3 mth rel str: 0.8%

Takeover potential: 1

Has strongest collection of spirits brands way ahead of nearest rival Pernod.. May make infill acquisitions.Will continue with eps-enhancing share buybacks.Well respected management.

Shares view: Now BUY Last Year BUY

The writer holds shares in this company

Reckitt Benckiser (RB.) £28.94

Market cap: £20,605 million

PE: 23.1 EPS growth: 11.6%

Yield:1.9% 3 mth rel str: 3.3%

Takeover potential: 1

Company enjoyed two profits upgrades Last Year . The acquisition of Boots' OTC pharmaceuticals business is progressing well. Further deals likely. Well regarded management team.

Shares view: Now HOLD Last Year BUY

The writer holds shares in this company

SABMIller (SAB) £14.39

Market cap: £21,6660 million

PE: 21.6 EPS growth: 2.7%

Yield:1.9% 3 mth rel str: 6.5%

Takeover potential: 1

Has been transformed into a major international brewer. Growing commitment to emerging markets. Agreement with Coors should help its US operations. Will make further acquisitions.

Shares view: Now HOLD Last Year HOLD

Scottish & Newcastle (SCTN) 725p

Market value: £6,864m

PE: 21.3 EPS growth: -4.3%

Yield: 3.0% 3 mth rel str: 22.7%

Takeover potential: 4

The group is currently in a bitter takeover battle with the Carlsberg/Heineken consortium, which has now offered 780p. UK volumes are under pressure and the real attraction is its holding in BBH, the Russian group.

Shares view: Now HOLD Last Year HOLD

CHEMICALS

by: Rachel Robson

Johnson Matthey (JMAT) £18.08

Market value: £3,881.3m

PE: 19 EPS growth: 16.2%

Yield: 1.9% 3 mth rel str: 13.7%

Takeover potential: 5

Benefitting from high oil prices, and has performed well despite weaker dollar. Three new factories will be opened this year in Russia, South Korea and the UK and global concerns about climate change are expected to help continue to drive sales of its catalyst products.

Shares view: Now HOLD Last Year HOLD

ELECTRICITY

by: Carlo Svaluto

British Energy (BGY) 593p

Market value: £6,125m

PE: 15.8 EPS growth: 76.5%

Yield: 5.72% 3 mth rel str: -4.4%

Takeover potential: 3

Shares have been volatile due to plant outages which will hit earnings, but the government's backing to new nuclear plants is good news for the company, and analysts are touching up estimates.

Shares view: Now HOLD Last Year HOLD

International Power (IPR) 457p

Market value: £6,867m

PE: 15 EPS growth: 80.4%

Yield: 2.53% 3 mth rel str: 8.5%

Takeover potential: 2

The power producer, with interests in 18 countries, keeps investing in plant expansions. The latest results were positive, despite the slowing dollar, and the shares will be seen as a quality, defensive investment.

Shares view: Now BUY Last Year BUY

Scottish & Southern Energy (SSE) £16.59

Market value: £4,537m

PE: 15.6 EPS growth: 50.7%

Yield: 3.80% 3 mth rel str: 17.1%

Takeover potential: 3

The third largest supplier of electricity and gas in the UK is leading the race for renewable energy, thanks to recent acquisition. The market has welcomed this diversification and earnings should be impacted positively.

Shares view: Now BUY Last Year BUY

FIXED LINE TELECOMMUNICATIONS

by: Russ Mould

BT (BT.A) 266.75p

Market value: £21,318m

PE: 10.9 EPS growth: 6.2%

Yield: 6.2% 3 mth rel str: -9.6%

Takeover potential: 1

Began 2007 well but performance faltered badly as the credit crunch eliminated any bid speculation, its IT services arm missed margin targets and competition remained as fierce as ever. Fat yield will offer support.

Shares view: Now HOLD Last Year BUY

Cable & Wireless (CW.) 180.4p

Market value: £4,466m

PE: 19.2 EPS growth: 50%

Yield: 4.5% 3 mth rel str: 1.1%

Takeover potential: 2

Big hike in November's interim dividend shows management remains as confident as ever in the restructuring story and any resolution to the UK pension deficit would again spark break-up or takeover talk. US dollar strength would also help.

Shares view: Now BUY Last Year HOLD

MULTIUTILITIES

by: Carlo Svaluto

Centrica (CNA) 346.25p

Market value: £12,742m

PE: 12.06 EPS growth: -92.1%

Yield: 4% 3 mth rel str: 6.9%

Takeover potential: 2

Coped well with rising gas prices in 2007 and analysts predict a jump in profits for the full year. It may be hard dealing with gas prices in 2008 but the company is in good shape.

Shares view: Now BUY Last Year BUY

Kelda (KEL) £10.80

Market value: £2,978m

PE: 14.9 EPS growth: 12.2%

Yield: 3.5% 3 mth rel str: 24.3%

Takeover potential: n/a

The owner of Yorkshire Water moved to the blue-chip index after recommending a £3 billion takeover from a consortium including a Singaporean investor, HSBC, Infracapital Partners and Prudential.

Shares view: Now HOLD Last Year SELL

National Grid (NG.) 862.5p

Market value: £21,957m

PE: 14.8 EPS growth: 13.3%

Yield: 4.2% 3 mth rel str: 18.7%

Takeover potential: 2

Diversified assets, visibility of earnings (it's a regulated business), upside to earnings, safe dividend, and many cash cows, such as a property portfolio that, if sold, could trigger additional handouts to shareholders.

Shares view: Now BUY Last Year BUY

Severn Trent (SVT) £14.87

Market value: £3,488m

PE: 15.8 EPS growth: 52.8%

Yield: 4.5% 3 mth rel str: 9.7%

Takeover potential: 3

The summer floods in the company's service area and a charge by the Serious Fraud Office added to share price volatility. Earnings should be in line with expectations and a takeover approach is also on the cards.

Shares view: Now HOLD Last Year SELL

United Utilities (UU.) 747p

Market value: £6,579m

PE: 14 EPS growth: 38.7%

Yield: 5.5% 3 mth rel str: 8.9%

Takeover potential: 3

Shareholders are being rewarded by a £1.87 billion sale of the electricity distribution assets, and the stronger focus on water is increasing interest in the company, even from the private equity world.

Shares view: Now BUY Last Year HOLD

GENERAL FINANCIAL

by: Simon Keane

3i Group (III) 924p

Market value: £3,581m

PE: 13.9 EPS growth: n/a

Yield: n/a 3 mth rel str: n/a

Takeover potential: 1

The investment trust is mainly in private companies (at the last count it had investments in 800 unquoted businesses). Given tough equity markets ahead the ability to float these businesses and crystallise gains will be limited.

Shares view: Now HOLD Last Year BUY

ICAP (IAP) 656p

Market value: £4,247m

PE: 19.4 EPS growth: 22.2%

Yield: 2.4% 3 mth rel str: 29%

Takeover potential: 1

Like the LSE (see below) the interdealer broker is benefiting from high market volatility. While volatility will drop off, migration to electronic away from phone broking will drive margins up but shares expensive on PE of 19.4.

Shares view: Now HOLD Last Year BUY

London Stock Exchange (LSE) £18.44

Market value: £5,159.2m

PE: 23.5 EPS growth: 17.1%

Yield: 1.3% 3 mth rel str: 12.6%

Takeover potential: 1

Once credit crunch-induced volatility is replaced by sluggish markets it'll make for difficult comparatives this financial year and, on a 23.5 PE, the shares are dear. Synergies from Borsa Italiana will offset lowe t ETS trading volumes.

Shares view: Now HOLD Last Year SELL

Man Group (EMG) 527p

Market value: £8,977m

PE: 13.1 EPS growth: 16.3%

Yield: 3.8% 3 mth rel str: -17%

Takeover potential: 1

Unlike traditional fund managers such as Schroders, skilful hedge fund managers can grow assets under management in falling markets, as well as rising ones. On a calenderised PE of 12 times about equally priced to Schroders but deserves premium.

Shares view: Now BUY Last Year BUY

Schroders (SDR) £11.13

Market value: £2,559.6m

PE: 11.7 EPS growth: 2.7%

Yield: 3% 3 mth rel str: -16.3%

Takeover potential: 1

Traditional fund managers, particularly those with exposure to property, such as Schroders, are having a torrid time. Finals in March will reveal the extent to which Schroders is affected, but negative share momentum indicates it has not escaped.

Shares view: Now SELL Last Year HOLD

GENERAL INDUSTRIALS

by: Dan Coatsworth

Rexam (REX) 370p

Market value: £2,378m

PE: 10.6 EPS growth: 23.7%

Yield: 5.7% 3 mth rel str: -27.6%

Takeover potential: 3

The impact of higher energy costs and weak dollar hurt the share price in 2007. But a previously blocked acquisition of rival Rostar now has the go ahead, which gives it a greater position in Russia.

Shares view: Now HOLD Last Year BUY

GENERAL RETAILERS

by: John Marshall

Carphone Warehouse (CPW) 306p

Market Value: £2,799m

PE:15.8 EPS growth: 170%

Yield:1.45 3 mth rel str: 5.8%

Takeover potential: 1

Analysts are salivating about the group's prospects with the shares being recommended almost universally. Profits are growing strongly. The founder, Charles Dunstone, is well regarded.

Shares view: Now BUY Last Year HOLD

Home Retail (HOME) 261p

Market Value: £2,292m

PE: 8.2 EPS growth: 31.9%

Yield: 5.6% 3 mth rel str: -29.4%

Takeover potential: 3

The company has suffered from competitive pressure in the toy market where it is the largest retailer through Argos. Its other business Homebase, is suffering from the traumas of the DIY market.

Shares View: Now HOLD Last Year BUY

The writer holds shares in this company

Kingfisher (KGF) 120p

Market Value: £2,824m

PE: 10.6 EPS growth: -8.1%

Yield: 8.4% 3 mth rel str: -32.4%

Takeover potential: 2

The dividend is definitely at risk especially as there will be a new CEO shaking things up. The group's overseas expansion is progressing well but the UK market is poor. Could eventually be taken over by Home Depot of the US.

Shares View: Now SELL Last Year HOLD

The writer holds shares in this company

Marks & Spencer (MKS) 395p

Market value: £6,649m

PE: 9.9 EPS growth: -2.0%

Yield: 5.7% 3 mth rel str: -33.7%

Takeover potential: 2

The City was shocked by the group's Christmas trading statement. Marks' magic seems to have, temporarily at least, disappeared. Management succession is beginning to become an issue. How long will the wilting Rose remain at the helm?

Shares View: Now HOLD Last Year BUY

The writer holds shares in this company

Next (NXT) £12.94

Market Value: £2,640m

PE: 7.8 EPS growth: 14.2%

Yield: 4.3% 3 mth rel str: -36.2%

Takeover potential: 2

Although the group's Christmas trading statement was more encouraging than many it has suffered from the general retail malaise. Share buybacks will generate good EPS growth, while it is adopting a cautious approach to 2008.

Shares View: Now BUY Last Year HOLD

The writer holds shares in this company

HEALTH CARE EQUIPMENT & SERVICES

by: Rachel Robson

Smith & Nephew (SN.) 577p

Market value: £5,169m

PE: 19.6 EPS growth: 8.9%

Yield: 1% 3 mth rel str: -1%

Takeover potential: 4

Two product recalls during the year didn't do it any favours but, with demand for its artificial hips and knees remaining strong, the group is an attractive takeover target. S&N's hip-resurfacing device is one of only two approved products in the US market.

Shares view: Now HOLD Last Year BUY

HOUSEHOLD GOODS

by: Carlo Svaluto

Persimmon (PSN) 672p

Market value: £2,016m

PE: 4.93 EPS growth: 55.7%

Yield: 8.60% 3 mth rel str: -32%

Takeover potential: 2

The shares more than halved this year due to housing worries, but the full year performance will reassure. The sector may not be buoyant, but the valuation is attractive and the chunky dividend should be safe.

Shares view: Now BUY Last Year BUY

Taylor Wimpey (TW.) 158.2p

Market value: £1,670m

PE: 6.10 EPS growth: 1.02%

Yield: 10.1% 3 mth rel str: -41.8%

Takeover potential: 3

Things aren't pretty for the merged Taylor Woodrow/George Wimpey outfit. Exposure to troubled US housing and unhappy prospects at home will hit the full year performance and there are cheaper shares in the sector.

Shares view: Now SELL Last Year n/a

LIFE INSURANCE

by: Carlo Svaluto

Aviva (AV.) 633p

Market value: £16,596m

PE: 7.14 EPS growth: 54.6%

Yield: 5.73% 3 mth rel str: -14.2%

Takeover potential: 2

Growth at the insurer's emerging markets operations should offset competitiveness in the UK and secure solid earnings. Aviva trades lower than net asset value and the FSA might allow distribution of 'orphan assets' to shareholders.

Shares view: Now BUY Last Year BUY

Friends Provident (FP.) 158p

Market value: £3,659m

PE: 9.52 EPS growth: 186%

Yield: 5.17% 3 mth rel str: -5.4%

Takeover potential: 4

The insurer was left weak after a failed merger with Resolution (RSL). Cash flow and UK market share are poor and many see value in break up, so investors should sit tight waiting for a takeover offer.

Shares view: Now HOLD Last Year BUY

Legal & General (LGEN) 127p

Market value: £8,016m

PE: 8.72 EPS growth: 67.8%

Yield: 5.04% 3 mth rel str: -6.1%

Takeover potential: 3

The company is delivering a capital restructuring strategy to fix some inefficiencies, which should bode well for earnings. Its structure is complex but allows flexibility and the shares are cheap, especially considering the fat yield.

Shares view: Now BUY Last Year BUY

Old Mutual (OML) 160p

Market value: £8,612m

PE: 8.54 EPS growth: 98.1%

Yield: 4.78% 3 mth rel str: -3.4%

Takeover potential: 3

The South African insurer is discussing the possible £1.2bn sale of a majority stake in subsidiary Mutual & Federal, and more details should be disclosed soon. Meanwhile, the earnings outlook is strong with exposure to emerging economies.

Shares view: Now BUY Last Year HOLD

Prudential (PRU) 671p

Market value: £16,574m

PE: 8.43 EPS growth: -12.3%

Yield: 2.85% 3 mth rel str: -9.5%

Takeover potential: 2

A trading update in October highlighted weakness in sales, especially in the UK, but the shares have performed reasonably well, due to hopes for consolidation. Switch to better yielding stocks in the sector.

Shares view: Now SELL Last Year HOLD

Resolution (RSL) 713p

Market value: £8,612m

PE: 13.08 EPS growth: 220%

Yield: 0.69% 3 mth rel str: 9.1%

Takeover potential: n/a

Shares in the closed fund specialist, after soaring 207% in a year, are being cancelled as it agreed a merger with stakeholder Pearl Assurance, after dropping two deals to join Friends Provident (FP.) and Standard Life (SL.).

Shares view: Now n/a Last Year HOLD

Standard Life (SL.) 239p

Market value: £5,196m

PE: 8.68 EPS growth: n/a

Yield: 5.01% 3 mth rel str: -15.2%

Takeover potential: 3

The market didn't like the idea of Standard Life snuggling up to Resolution, and the shares have suffered. However, the first year as a listed company was successful and the future should be bright too.

Shares view: Now BUY Last Year HOLD

MEDIA

by: Susanna Twidale

British Sky Broadcasting (BSY) 575p

Market value: £10,070m

PE: 17.8 EPS growth: -12.1%

Yield: 3.1% 3 mth rel str: -13.1%

Takeover potential: 1

The subject of several regulatory issues and stands to lose hundreds of millions if forced to sell down ITV stake. But it is being touted as a defensive stock in the sector by some due to the contract nature of its subscriptions and lower reliance on advertising.

Shares view: Now HOLD Last Year HOLD

ITV (ITV) 76p

Market value: £2,956m

PE: 15.9 EPS growth: -4.1%

Yield: 4.2% 3 mth rel str: -24.7%

Takeover potential: 4

Weak advertising markets will be a key issue in 2008, with more gloomy predictions. Sky's probable need to sell a sizeable chunk of the shares will hang over them, but if they remain depressed it wouldn't be a shock if buyers come sniffing round.

Shares view: Now HOLD Last Year BUY

Pearson (PSON) 689p

Market value: £5,567m

PE: 14.7 EPS growth: 7.02%

Yield: 4.9% 3 mth rel str: -5.3%

Takeover potential: 3

Looks vulnerable in a slowdown, with concerns over the US education market and financial advertising expected to weaken. The shares tanked Last Year and it's hard to see where a catalyst for recovery will come from.

Shares view: Now SELL Last Year HOLD

Reed Elsevier (REL) 659p

Market value: £7,240m

PE: 16.6 EPS growth: 24.1%

Yield: 2.9% 3 mth rel str: -1.9%

Takeover potential: 4

With a successful sale of its education division complete, it is also tipped to announce significant cost savings. M&A activity isn't out of the questions and could provide a boost to the shares if the right deal is done.

Shares view: Now BUY Last Year HOLD

Reuters (RTR) 623p

Market value: £7,864m

PE: 22.1 EPS growth: -23.4%

Yield: 2.1% 3 mth rel str: -0.1%

Takeover potential: 5

With just a few regulatory crossings of the Ts and dottings of the Is to be done, a merger with Thomson should be completed by the end of the first quarter. Thompson will pay 352.5p in cash plus 0.16 of a share, valuing Reuters at £8.7 billion, or 705p a share.

Shares view: Now HOLD Last Year HOLD

WPP (WPP) 599p

Market value: £7,119m

PE: 11.8 EPS growth: 14.2%

Yield: 2.6% 3 mth rel str: -9.7%

Takeover potential: 1

Its Q3 results were disappointing, leading the shares to tick down. The advertising market is likely to be tough in 2008 despite expected fillips from the Olympics and US presidential race. Its growth in emerging markets, however, should continue.

Shares view: Now HOLD Last Year BUY

Yell (YELL) 322p

Market value: £2,511m

PE: 7.8 EPS growth: -9.4%

Yield: 6.3% 3 mth rel str: -26.6%

Takeover potential: 3

An abysmal 2007 saw the shares more than halve, and competition and weaker US markets are likely to remain painful. The only bright spot is that the bad news now looks to be priced in and, with a tasty divi yield, they are worth holding.

Shares view: Now HOLD Last Year HOLD

MINING

by: Dan Coatsworth

Anglo American (AAL) £30.44

Market value: £40,246m

PE: 11.9 EPS growth: 90.9%

Yield: 2.4% 3 mth rel str: -2.1%

Takeover potential: 4

New CEO Cynthia Carroll has been welcomed by the City as she slims down the diversified mining group. Rising operating costs have hurt but there's a healthy project pipeline as Anglo makes significant investments.

Shares view: Now BUY Last Year HOLD

Antofagasta (ANTO) 688p

Market value: £6,783m

PE: 10.1 EPS growth: -34%

Yield: 3.4% 3 mth rel str: -10.2%

Takeover potential: 4

A weak copper and flat molybdenum price in the past six months doesn't bode well if Antofagasta is to find a way of coping with higher costs. Unless performance improves, bid talk last seen in 2005 could return.

Shares view: Now HOLD Last Year BUY

BHP Billiton (BLT) £15.42

Market value: £34,426m

PE: 11 EPS growth: 24%

Yield: 1.9% 3 mth rel str: -5.4%

Takeover potential: 2

Unlikely to secure Rio Tinto, BHP should still perform well with its vast range of projects. A tie-up would ease cost pressures through efficiencies of scale, but big enough to cope on its own.

Shares view: Now BUY Last Year BUY

Kazakhmys (KAZ) £13.24

Market value: £6,092m

PE: 8.3 EPS growth: 7.3%

Yield: 2% 3 mth rel str: -9.4%

Takeover potential: 1

Production figures have recently disappointed which means profit will also be affected, due to equipment delays. But a large investment in Eurasian Natural Resources has already yielded 12% gains since the peer floated on the LSE last month.

Shares view: Now HOLD Last Year BUY

Lonmin (LMI) £31.94

Market value: £4,990m

PE: 18.2 EPS growth: 23.9%

Yield: 1.9% 3 mth rel str: -6.2%

Takeover potential: 3

The platinum producer may increased profits on higher selling prices, but operations are a mess. Production volumes are down; its furnaces have seen complications. Workers have been on strike. Sales growth may not offset cost pressures.

Shares view: Now SELL Last Year HOLD

Rio Tinto (RIO) £52.15

Market value: £52,006m

PE: 14.2 EPS growth: 26.4%

Yield: 1.1% 3 mth rel str: 31.8%

Takeover potential: 5

A surprise move by BHP on Rio has put the group firmly in play. A Chinese consortium has a better chance of making the right offer as money is less of a restraint.

Shares view: Now HOLD Last Year BUY

Vedanta Resources (VED) £21.36

Market value: £6,150m

PE: 12.2 EPS growth: -48%

Yield: 0.9% 3 mth rel str: 5.1%

Takeover potential: 2

The acquisition of Indian group Sesa Goa was wise given stronger iron ore prices this year. Energy requirements in Asia create opportunities to grow its position in commercial power. Aluminium, copper and zinc production continues to progress.

Shares view: Now BUY Last Year BUY

Xstrata (XTA) £32.67

Market value: £31,744m

PE: 10.1 EPS growth: 6.7%

Yield: 0.8% 3 mth rel str: 5.6%

Takeover potential: 5

Xstrata says it is open to a takeover. Anglo American could be a predator, as could a Chinese player. Even if a bid doesn't emerge, Xstrata has plenty of solid projects to support a growing share price.

Shares view: Now BUY Last Year BUY

MOBILE TELECOMMUNICATIONS

by: Russ Mould

Vodafone (VOD) 187.7p

Market value: £99,699m

PE: 14.7 EPS growth: 8.3%

Yield: 4.1% 3 mth rel str: 11.1%

Takeover potential: 1

Cash raised from disposals has been shrewdly recycled into emerging growth markets such as India and Turkey and 2006's five-point strategic plan is paying off in the form of improving earnings and free cash flow momentum. A likely safe haven in 2008.

Shares view: Now BUY Last Year BUY

NONLIFE INSURANCE

by: Carlo Svaluto

Admiral Group (ADM) 997p

Market value: £2,219m

PE: 19.1 EPS growth: 21.9%

Yield: 4.25% 3 mth rel str: 10.8%

Takeover potential: 3

The owner of comparison site Confused.com moved to the FTSE 100 at the latest review, but the motor insurance market is challenging. The company should cope, but the difficult environment and pricey valuation means investors should hold.

Shares view: Now HOLD Last Year HOLD

Royal & Sun Alliance (RSA) 139.5p

Market value: £4,537m

PE: 8.77 EPS growth: 40.9%

Yield: 5.07% 3 mth rel str: -4.4%

Takeover potential: 3

The company's largest division is UK commercial insurance, where competitiveness is fierce. Rates are picking up a little but it's early to tell the impact on earnings. Premium income for personal insurance should give support.

Shares view: Now HOLD Last Year HOLD

OIL & GAS PRODUCERS

by: Tom Seiber

BG (BG.) £11.30

Market cap: £37,957m

PE: 19.4 EPS growth:12.9%

Yield: 0.8% 3 mth rel str: 44.8%

Takeover potential: 4

BG performed exceptionally Last Year , up 76% on the back of rising oil prices, bid rumours, and massive oil discoveries offshore Brazil. Interest from China looks set to be a continuing theme in 2008.

Shares view: Now BUY Last Year BUY

BP (BP.) 628p

Market cap: £118,734m

PE: 10.8 EPS growth: 15.1%

Yield: 3.65% 3 mth rel str: 16.6%

Takeover potential: 2

This stock is still significantly undervalued when set against the underlying value of its assets. With a programme of widespread restructuring planned, expect it to capitalise on $100 oil under new chief executive Tony Hayward.

Shares view: Now BUY Last Year BUY

Cairn Energy (CNE) £28.76

Market cap: £3,761m

PE: 253 EPS growth: 50.2%

Yield: n/a 3 mth rel str: 45.3%

Takeover potential: 4

Restored to the blue chip index Last Year after a nine month absence. ENI's bid for Burren Energy (BUR) suggests that second-tier oil and gas firms remain on the radar as the giants of the industry seek to replenish their reserves.

Shares view: Now HOLD Last Year BUY

Royal Dutch Shell (RDSB) £21.25

Market cap: £58,636m

PE: 10.7 EPS growth: -2.87%

Yield: 3.48% 3 mth rel str: 14.6%

Takeover potential: 1

Heavy investment in the Canadian tar sands reflects CEO Jeroen van der Veer's focus on expensive and unconventional options. The company should continue to perform in 2008 but does not have earnings momentum of BP.

Shares view: Now HOLD Last Year HOLD

Tullow Oil (TLW) 667p

Market cap: £4,796m

PE: 31.6 EPS growth: 38.8%

Yield: 0.87% 3 mth rel str: 17.2%

Takeover potential: 3

Tullow broke into the big league after making some impressive discoveries in West Africa – the question now is can it repeat that success? The indications are that it will face a stern challenge to match Last Year 's performance.

Shares view: Now HOLD Last Year BUY

PHARMACEUTICALS & BIOTECHNOLOGY

by: Susanna Twidale

AstraZeneca (AZN) £22.30p

Market value: £32,549m

PE: 10.5 EPS growth: 77.2%

Yield: 4.2% 3 mth rel str: -9.2%

Takeover potential: 2

With generic threats to core drugs hanging over the company, it needs to do more to bolster its pipeline. Any disappointments from trials could dent the shares, but with investors flocking to more defensive stocks they should hold up.

Shares view: Now HOLD Last Year HOLD

GlaxoSmithKline (GSK) £13.60

Market value: £74,969m

PE: 13.6 EPS growth: 17.6%

Yield: 4.1% 3 mth rel str: 7.8%

Takeover potential: 2

Has a big year ahead with new broom Andrew Witty taking the helm and key trial data, which could boost the shares. Plans to launch some 25 new drugs over the next three years, high cash generation and safe-haven qualities make it the most attractive in the sector.

Shares view: Now BUY Last Year BUY

Shire (SHP) £11.40

Market value: £6,344m

PE: 23 EPS growth: -80.5%

Yield: 0.3% 3 mth rel str: -4.1%

Takeover potential: 3

Upgrades have helped stock to rise recently, and its defensive qualities should keep them up. With it being so much smaller than its peers, takeover speculation is never far away, which could also lift the shares.

Shares view: Now HOLD Last Year HOLD

REAL ESTATE

by: Rachel Robson

British Land (BLND) 906.5p

Market value: £4,629.6m

PE: 17.9 EPS growth: -84.6%

Yield: 3.6% 3 mth rel str: -17.9%

Takeover potential: 1

Became a Reit Last Year but the shares have performed poorly following credit crunch. Tough times lie ahead. At its interims the net asset value per share remained unchanged despite delivering rental rises.

Shares view: Now HOLD Last Year HOLD

Hammerson (HMSO) 969p

Market value: £2,798.8m

PE: 23.6 EPS growth: 25.5%

Yield: 2.7% 3 mth rel str: -14.8%

Takeover potential: 2

Has expanded and developed its portfolio and expects to see modest increases in rents in its shopping centres and retail parks in the UK and France. The recent credit crunch may affect demand for office space, however.

Shares view: Now HOLD Last Year HOLD

Land Securities (LAND) £14.60

Market value: £6,787m

PE: 18.8 EPS growth: -2.3%

Yield: 4.4% 3 mth rel str: -12.1%

Takeover potential: 1

Is demerging business into three specialist separately quoted entities - Retail, London, and Property Outsourcing. Recently announced the creation of a 50:50 joint venture with Sainsbury (SBRY), which will initially run for seven years.

Shares view: Now HOLD Last Year HOLD

Liberty International (LII) £10.16

Market value: £3,678.7m

PE: 26.9 EPS growth: -57.8%

Yield: 3.3% 3 mth rel str: -6.1%

Takeover potential: 2

Has used its Reit status to its advantage and has expanded well, with occupancy levels and demand remaining strong, despite its share price losing momentum. Further portfolio growth is likely.

Shares view: Now HOLD Last Year BUY

SOFTWARE & COMPUTER SERVICES

by: Russ Mould

Sage (SGE) 228.5p

Market value: £2,981m

PE: 15.8 EPS growth: 8.2%

Yield: 3.1% 3 mth rel str: -6%

Takeover potential: 1

A 95% hike in Last Year 's dividend highlighted powerful cash generation but progress in the USA remains disappointing and the region could again hold the firm back in 2008, despite a management shake-up there. More acquisitions likely.

Shares view: Now HOLD Last Year HOLD

SUPPORT SERVICES

By: Dan Coatsworth

AMEC (AMEC) 815p

Market value: £2,713m

PE: 21.4 EPS growth: 43.3%

Yield: 1.9% 3 mth rel str: 7.6%

Takeover potential: 4

Recently said profit to hit top of market expectations. Meeting margin targets and delivering value to shareholders. The sale of several divisions has left Amec focused on oil services and utilites support.

Shares view: Now BUY Last Year HOLD

Capita (CPI) 678p

Market value: £4,129m

PE: 21.1 EPS growth: 15.5%

Yield: 2.1% 3 mth rel str: -3.7%

Takeover potential: 2

Secured £1.9 billion worth of contracts in 2007. Well placed to pick up work from businesses looking to save money in tough markets by outsourcing. Stock is expensive, trading on a 50% premium to the sector average.

Shares view: Now HOLD Last Year BUY

Experian (EXPN) 395p

Market value: £4,4045m

PE: 12 EPS growth: 12.1%

Yield: 2.6% 3 mth rel str: -23.8%

Takeover potential: 3

The share price nearly halved in late 2007 after a slowdown in US business. It still expects to meet analyst profit forecasts. Could be worth a punt on share price recovery but don't expect a smooth ride.

Shares view: Now HOLD Last Year BUY

Rentokil Initial (RTO) 117p

Market value: £2,123m

PE: 11.9 EPS growth: 5.7%

Yield: 6.3% 3 mth rel str: -28.3%

Takeover potential: 4

Weak trading in the City Link division has dampened the hygiene group's prospects. First half group profits were down on high interest costs but restructuring benefits looked to be taking effect in Q3. Cautious outlook.

Shares view: Now HOLD Last Year HOLD

G4S (GFS) 226p

Market value: £2,898m

PE: 14.7 EPS growth: 16.2%

Yield: 2.7% 3 mth rel str: 13.7%

Takeover potential: 3

Recently promoted to the FTSE 100, Group 4 Securicor is looking overseas for growth, including Brazil and China. Cash services revenue is strong. Keeping chin up despite exposure to weak US dollar.

Shares view: Now HOLD Last Year HOLD

Wolseley (WOS) 677p

Market value: £4,476m

PE: 8.3 EPS growth: 9.7%

Yield: 5.4% 3 mth rel str: -20.2%

Takeover potential: 5

Shares in the building supplies group were annihilated in 2007 as it felt the pains of a slump in the US housing market. With no sign of a major market improvement, sentiment remains weak on the stock.

Shares view: Now HOLD Last Year BUY

TOBACCO

by: John Marshall

British American Tobacco (BATS) £19.74

Market value: £39,827m

PE:18.4 EPS growth: 16.7%

Yield: 3.3%. 3 mth rel str 17.8%

Takeover potential: 1

Profits are benefiting from strong cost control and the increased emphasis upon the four higher-margin drive brands - Kent, Dunhill, Pall Mall and Lucky Strike. Good defensive appeal.

Shares view: Now BUY Last Year BUY

The writer holds shares in this company

Imperial Tobacco (IMT) £26.70

Market value: £18,089m

PE:17.5 EPS growth: 13.7

Yield:3.0% 3 mth rel str: 21.2%

Takeover potential: 1

Brand leader in the UK, the company has been transformed into a truly international business. Acquisition of Altadis will be earnings-enhancing. The shares offer defensive attractions.

Shares view: Now BUY Last Year HOLD

FOOD PRODUCERS

by: John Marshall

Associated British Foods (ABF) 873p

Market cap: £6,911m

PE: 16.5 EPS growth:0.4%

Yield: 2.2% 3 mth rel str: 10%

Takeover potential: 1

Group has been hit by the reform of the EU sugar regime, which should be helpful going forward. Primark is dominant 'value' retailer. Family controlled. Well respected. Has strong brands.

Shares view: Now BUY Last Year BUY

The writer holds shares in this company

Cadbury Schweppes (CBRY) 623p

Market cap: £13,135m

PE:22.1 EPS growth:-0.8%

Yield: 2.4% 3 mth rel str: 8.3%

Takeover potential: 3

The company will demerge its beverages business this year. That could lead to further corporate activity. The group has some challenging medium-term targets but the City is sceptical.

Shares view: Now HOLD Last Year BUY

Unilever (ULVR) £19.05

Market cap: £23,727 m

PE:19.8 EPS growth: 8.2%

Yield:2.8% 3 mth rel str: 26.5%

Takeover potential: 1

Company is being transformed under new management team. Has many strong brands and a substantial commitment to emerging markets. Analysts more supportive. Selling underperforming businesses.

Shares View: Now BUY Last Year HOLD

The writer holds shares in this company

FOOD & DRUG RETAILERS

by: John Marshall

Morrison (William) (MRW) 316p

Market value: £8,495m

PE: 23.0 EPS growth: 57.7%

Yield:1.6% 3 mth rel str: 12.3%

Takeover potential: 4

Recovering under new CEO from botched Safeway merger. Gaining market share. Ken Morrison is due to retire as chairman this year but, if he sells his stake before changes in CGT become effective, it could open the door to a takeover.

Shares view: Now BUY Last Year HOLD

The writer holds shares in this company

Sainsbury (SBRY) 422p

Market value: £7,346m

PE:22.5 EPS Growth: 25.5%

Yield: 2.8% 3 mth rel str: -25.5%

Takeover potential: 2

Suffered two failed takeover bids Last Year . Credit crunch could defer a third. Facing increased competition from Waitrose. Profits and earnings are still well below peak level.

Shares view: Now HOLDLast Year HOLD

Tesco (TSCO) 468p

Market value: £36,699m

PE:18.8 EPS growth: 19.9%

Yield: 2.4% 3 mth rel str: 3.1%

Takeover potential: 1

The nation's favourite grocer, international expansion is the key to future growth. Has been successful in Central Europe and Asia, and opened its first US stores last autumn. A very well-managed firm.

Shares view: Now BUY Last Year BUY

The writer holds shares in this company

TRAVEL & LEISURE

by: Rachel Robson, Dan Coatsworth

FirstGroup (FGP) 757p

Market value: £3,299.2m

PE: 15.9 EPS growth: 21.9

Yield: 2.2 3 mth rel str: 13.8

Takeover potential: 3

Fuel costs are main risk due to high oil prices. Rail and bus divisions have performed strongly, although the First Great Western franchise still faces problems. October's US acquisition of intercity bus operator Laidlaw should prove fruitful in 2008.

Shares view: Now BUY Last Year BUY

Carnival (CCL) £20.75

Market value: £3,402m

PE: 12.8 EPS growth: 13.2%

Yield: 3.6% 3 mth rel str: -9.7%

Takeover potential: 2

Q4 revenue beat analyst forecasts but rising fuel costs and a slowdown in consumer spending could depress the cruise ship operator. High exposure to the US economy - around 70% of customers - is a worry, but shares look cheap.

Shares view: Now HOLD Last Year BUY

Compass (CPG) 307p

Market value: £5,789m

PE: 15.7 EPS growth: 19.9%

Yield: 3.9% 3 mth rel str: 2.8%

Takeover potential: 2

The catering group has been hit by rising food cost inflation. However, it has passed on costs where possible and restructuring has proved successful so far. Shares look pricey on a 25% premium to the sector. May surprise on the upside.

Shares view: Now HOLD Last Year SELL

Enterprise Inns (ETI) 420p

Market value: £2,131m

PE: 9.8 EPS growth: -20.9%

Yield: 4.2% 3 mth rel str: -30.9%

Takeover potential: 4

The pub operator saw its shares fall dramatically in 2007 on the smoking ban, postponement of a £750 million refinancing plan and failure to realise value in its property portfolio. It still may find a way to secure REIT status.

Shares view: Now HOLD Last Year SEL

InterContinental Hotels (IHG) 817p

Market value: £2,406m

PE: 14.4 EPS growth: 22.1%

Yield: 2.8% 3 mth rel str: -16%

Takeover potential: 5

Expensive stock despite grossly underperforming the FTSE All-Share in 2007. Pushing a revamped Holiday Inn brand this year. Bid rumours continue following 10% stake purchase by Barclay brothers. Weak exchange rates may hurt earnings.

Shares view: Now HOLD Last Year HOLD

British Airways (BAY) 302.8p

Market value: £3,490.6m

PE: 6 EPS growth: 48.9

Yield: 3 3 mth rel str: -25.4

Takeover potential: 3

Faced a £121.5 million penalty and a $300 million fine during 2007. Competition remains strong and will be heightened by start of the Open Skies agreement in March, although terminal and runway capacity limitations may help contain this. Heathrow's Terminal 5 will be beneficial.

Shares view: Now HOLD Last Year HOLD

Thomas Cook (TCG) 265p

Market value: £2,589m

PE: 13.8 EPS growth: n/a

Yield: n/a 3 mth rel str: -3.8%

Takeover potential: 2

Having merged with MyTravel, the enlarged group is cutting back on the number of holidays on sale, so it has fewer last minute holidays to shift. It believes this will improve profit. Still has to face sector-wide risk of consumer spending slowdown.

Shares view: Now BUY Last Year n/a

TUI Travel (TT.) 267p

Market value: £2,982m

PE: 16.5 EPS growth: n/a

Yield: n/a 3 mth rel str: 8.4%

Takeover potential: 2

Created from the tie-up between First Choice and TUI Tourism, the group has seen successful overseas bookings offset a weak UK summer.

2008 may show little profit growth, but strong gains are forecast for 2009. High-risk punt.

Shares view: Now BUY Last Year n/a

Whitbread (WTB) £12.30

Market value: £2,203m

PE: 13.8 EPS growth: 434%

Yield: 3% 3 mth rel str: -24.2%

Takeover potential: 3

Premier Inn should do well as budget hotels pick up custom from business travellers looking for cheaper deals. The pub restaurants business may struggle but the accommodation arm will be the group's saving grace.

Shares view: Now BUY Last Year BUY