Citi has taken a selective stance on Europe’s retail and brands sector for 2026, arguing that a sluggish economic backdrop means investors should favour companies with clear structural advantages.
Its top picks are Inditex (buy) and Tesco PLC (LSE:TSCO) (buy), while Associated British Foods PLC (LSE:ABF) is rated 'sell'.
The bank expects only 1.1% growth in the UK’s discretionary spending power next year — the money households have left after essential costs.
Grocery inflation should ease to 3%, down from 4.2% this year, which helps stretched shoppers but also limits top-line momentum for supermarkets.
Citi flags a couple of pressure points. One is the rise of consumer-to-consumer fashion platforms, which could nibble away at demand for value retailers.
Another is the UK’s incoming tariff regime, which it expects will be felt more fully in 2026. On the positive side, business rates reform looks “not as bad as feared”, and Brussels’ plan to close the de-minimis loophole, a rule that lets low-value parcels enter the EU tariff-free, should help traditional retailers competing with cross-border online sellers.
Given the muted outlook, Citi prefers operators able to grow by taking share rather than relying on the economy.
It highlights Inditex’s store optimisation strategy and Tesco’s retail media expansion as examples. The broker recently upgraded Sainsbury’s to 'buy', lifted H&M to 'neutral', and cut BME to 'neutral', with further target-price changes detailed in the report.