BAE Systems was a gainer on Tuesday as the FTSE 100 returned to its highest level in more than two years.

Shares in BAE climbed 1.9 per cent to 348½p as the management played down defence spending fears at a meeting with investors in London. BAE’s profitability looks to be underpinned by long-term support contracts, which make up about half of group revenue, investors said.

The rally was also helped by a JPMorgan Cazenove note arguing that BAE had cut its pension deficit by nearly a third.

The equity rally since BAE’s reported interim results is likely to have cut the deficit from £5bn to about £3.9bn, said analyst John Middleton.

He also reckoned that, if BAE can switch its inflation link to the consumer price index, as BT Group did last week, the headline liability would fall to £3.4bn. That would be equivalent to 9 per cent of its enterprise valuation. “We continue to see the BAE System pension as a medium-term catalyst for the group, having been a headwind for the last decade,” Mr Middleton said in a note repeating “overweight” advice.

Miners supported the broader rally, which pushed the FTSE 100 up 0.4 per cent or 25.23 points to 5,875.19. That was less than a point below Friday’s closing level, which was the highest since June 2008.

Precious metals miners followed the gold price, which hit another record high. African Barrick Gold rose 3.1 per cent to 555p, Petropavlovsk was up 8.3 per cent to £10.27 and Centamin Egypt gained 6.5 per cent to 197¼p.

Randgold Resources rallied 5.6 per cent to £62.65 after its third-quarter results proved better than some feared in the wake of operational problems.

Better-than-expected quarterly results lifted Schroders by 5.5 per cent to £16.67. Barclays provided some reassurance on bad debts and investment bank revenues and took on 4 per cent to 297p. “Ending the downgrade cycle has been a major factor for Barclays,” said Merrill Lynch. “Today’s [statement] suggests we might be there.”

Among the fallers, Intercontinental Hotels dropped 5.2 per cent to £11.40 on profit taking after its earnings missed forecasts largely due to rising costs. Evolution Securities called the hotelier “a hyped momentum stock now having to cope with the reality of a slower recovery after the rebound.”

G4S slid 2.1 per cent to 253½p on a cautious response to Monday’s results from the security group. Management’s guidance for 4 per cent organic growth in 2011 will probably leave G4S lagging behind sector peers, suggesting the shares no longer deserve to trade at a sector premium, said Danske Bank in a downgrade to “hold”.

Yell Group dived 20.5 per cent to 12¼p after another sales warning from the directories publisher brought concerns about its debt limits back into focus.

“Our new numbers imply the group could hit its covenant in 2013, suggesting a reset may be necessary at some point,” said house broker Merrill Lynch. “Given the degree of volatility and uncertainty over future revenue trends, risks around covenants and with a new management team set to take over at the helm, we think it is difficult to have too positive a stance right now.”

Other debt-constrained companies followed Yell lower, with Punch Taverns off 3.1 per cent to 66p and Premier Foods falling 2.5 per cent to 19p.

A UBS downgrade to “neutral” sent Dunelm, the homewares retailer, lower by 2.4 per cent to 493p. With shares at a 30 per cent premium to the retail sector, superior growth is already in the price, UBS said.

Insulation group SIG, which has a trading statement due next week, rose 2.4 per cent to 114½p on the highest daily turnover since May. Traders speculated that Canadian rival IKO might have been adding to its 5 per cent stake.

Aegis rose 2.7 per cent to 131½p after Merrill Lynch said a trading update from the media agency due Friday was likely to beat expectations. Fading take-over speculation has meant Aegis shares have underperformed peers, in spite of strong results from market research peers, it said.

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