Proactive Investors - Tesco PLC (LON:TSCO) and B&M European Value Retail SA (LON:BMEB) are two prominent fallers in the FTSE 100 in early deals knocked by downgrades by JP Morgan.
The US investment bank has double downgraded B&M to underweight from overweight and moved Tesco to neutral from overweight sending shares down 5.6% and 2.5% respectively.
"We take a cautious stance on the sector, reflecting our analysis of grocery pricing deflation prospects as we approach 2024," JP said.
"We think current sentiment and valuations make for an unattractive risk reward as investors start to reassess portfolios into 2024, when we expect grocers' P&L and cash flow dynamics to worsen vs 22-23, triggering downside risk to consensus," the bank added.
Deflation is a real possibility and its implications not factored into either expectations or share prices, JPM thinks.
"Steep disinflation/deflation will likely trigger heightened competition, with price investments denting gross margins."
"This, combined with sticky minimum wage increases, shall cloud operating margin outlook," the bank reckons.
Across Europe, the bank has downgraded Ahold-Delhaize to underweight from overweight, Jeronimo to underweight from neutral but upgraded Colruyt to overweight from underweight.
FTSE 100 hit by slowdown in China's service sector
The FTSE 100 has opened lower after growth in China’s service sector hit an 8-month low, while a downgrade pulled the UK’s largest food retailer, Tesco PLC lower.
At 8:15am, London’s lead index was down 50.05 points, 0.7%, at 7,402.71 while the FTSE 250 slipped 75.27 points, 0.4%, at 18,448.87.
In China, the Caixin services purchasing managers’ index fell to an eight month-low of 51.8 in August from 54.4 in July, reminding investors of the issues the world’s second largest economy still faces, after a brief bout of optimism on Monday.
Economists had expected a figure of 53.6 and the news contributed to falls in the Shanghai Composite and Hang Seng.
Back in the UK, and there was better news for retailers as the BRC/KPMG retail sales monitor showed a sharp recovery in retail sales in August.
Samuel Tombs at Pantheon Macroeconomics said the “survey suggests that July’s 1.2% month-to-month fall in the official measure of sales volumes was a blip driven by bad weather.”
Total UK retail sales increased 4.1% on an annual basis in August, picking up sharply from the 1.8% rise recorded in July.
Tombs thinks a consumer-led recession is unlikely.
“Further growth in real expenditure should be underpinned over coming quarters by wages rising more quickly than prices,” he thinks.
Stocks on the move include Tesco PLC, down 2.6%, after JP Morgan downgraded the stock to neutral from overweight as it took a more cautious stance on the sector.
Ashtead (LON:AHT) fell 5.3% as it warned of softening UK markets.
Nonetheless, the firm backed full-year guidance after reporting strong growth in first quarter revenue and profit.