Tesco PLC (LSE:TSCO) is the top pick in European Retail in a wide-ranging note by Morgan Stanley.
J Sainsbury also gets an upgrade but there are downgrades for H&M, AB Foods and Kingfisher.
The investment bank said its thesis for the year ahead is simple.
As price inflation moderates across geographies, top-line growth will become increasingly reliant on volumes.
“We expect retailers who are in the sweet spot to be rewarded by the market, as volume-led top-line growth should command a higher multiple and as volumes improve, margins stand to benefit from operating leverage.
The bank said the market is overly fearful of deflation and missing the bounce-back in volumes.
It expects volumes/mix to turn positive from the second quarter, driving 2025 annual growth of 2.5%.
On the inflation front, MS expects 1%-4% for the year ahead.
Tesco, rated overweight, is its top pick. “We see 6% EPS upside to Street,” the bank said.
It also expects the cash payout will be increased at the annual results (via extra buyback or divi) and has raised EPS estimates.
Morgan Stanley (NYSE:MS) has upgraded Sainsbury to equal weight from underweight, predicting an improving margin outlook in grocery, plus the launch of a buyback at its CMD. It has raised EPS estimates by 5% and 11% for the next two years.
But Primark owner AB Foods has been cut to equal weight from overweight believing the margin recapture narrative has played out while there are risks to volume growth.
Kingfisher has been lowered to underweight from equal weight with Morgan Stanley (NYSE:MS) expecting trends in DIY across UK / France / Poland to remain challenging for the next 12 months.
It expects consensus forecasts to come down a further 4%.
B&M remains at equal weight with M&S reiterated at overweight.