LONDON The return of "stark" inflation and the difficulties for retailers in passing higher costs through to customers point to a tough 2017 for UK grocers and supermarkets, Bank of America Merrill Lynch analysts said, adding they prefer peers listed in continental Europe.
The lack of further deterioration in the outlook for Europe's economy and improving consumer confidence are likely to benefit listed food retailers while those focused on the U.S. and emerging markets will see growth, BoFA-ML said.
Broadly, higher commodity prices are contributing to returning expectations of food price inflation.
That is bad news for the UK supermarket sector which will likely grapple with a slowing economy pushing customers towards cheaper offerings or discounts, the broker said in a note to clients.
BofA-ML analysts upgraded France's Casino (CASP.PA) to "Buy" and downgraded WM Morrison (MRW.L) to "underperform".
Casino shares rose more than 4 percent in early trading.
UK supermarkets are poised to report holiday season trading updates this week.
(Reporting by Vikram Subhedar, editing by Kit Rees)