UK retail is not out of the woods yet, reckons Credit Suisse, with the drag on consumer disposable income still having a long way to go.
Household budgets in 2023 look challenged, despite the resilient Christmas trading period, the broker added.
Specifically, interest rates, mortgages and energy have further to rise, while food price inflation will be slow to normalise.
Credit Suisse favours Primark owner Associated British Foods, reporting tomorrow (24 January) and M&S to deal with the rising rate environment best.
This, it said, is due to both benefiting from a food business which is supported by inflation.
Primark should also benefit from consumers trading down while M&S’s relatively high-income household base should be less exposed to inflation, dealing better with an economic downturn.
JD Sports, Credit Suisse said, offers upsides through capital allocation and reinforced growth prospects.
Next offers little upside from an execution, valuation or operational leverage and its £1.2bn credit book could be vulnerable.
B&M’s food sales should benefit from trade-down and food inflation, although its general merchandise products are more discretionary.
Kingfisher has the most exposure to the UK housing market, where the broker expects a softening in mortgage approvals and house prices.