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June 24, 2020, 8:45 a.m. EDT

A surge in U.K. retail stocks has gone ‘too far, too fast,’ warns Citigroup

By Barbara Kollmeyer, MarketWatch

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Shoppers wearing protective face masks walk past an advertising screen promoting face coverings in Westfield shopping center in east London on June 22, 2020.

Investors are underestimating downside risks from COVID-19, and the run enjoyed by the retail sector lately is probably not going to last, said analysts at Citigroup, in a note to clients on Wednesday.

Down 2.1% to 6,184.91, the FTSE 100 index (FTSE:UK:UKX)  on Wednesday was in the grips of its worst one-day selloff since June 11, as global stocks fell amid rising concerns over the U.S. coronavirus outbreak. The U.K. is poised to allow pubs, restaurants and cinemas to reopen on July 4, according to Prime Minister Boris Johnson, though scientists have warned there is a risk of making the current outbreak worse.

Citi analysts Adam Cochrane and Matthew Garland downgraded to sell shares of retail names Kingfisher (LON:UK:KGF)  and Next (LON:UK:NXT) , which fell 3.6% and 3%, respectively, leading losses on the main index. Away from the FTSE 100, Dunelm Group (LON:UK:DNLM)  . Those shares fell nearly 4%.

And those shares have all seen an impressive quarter, up 51%, 23% and 67%, respectively so far. And t they are “less well structurally placed in the midterm,” said the analysts.

“Now is not the time to increase overall exposure to the U.K. retail sector,” said the team. “We are facing the worst economic crisis in a generation and consumer spending will likely reflect this.”

“We believe the recent rebound in share prices is based on shorter-term impacts, but underestimates lower fundamental demand,” said the analysts, adding that they expect any consumer recovery will take until at least 2022, which implies downside risks for earnings forecasts.

But companies with a focus on online businesses or a differentiated business model in a more resilient retail segment may fare better, said Citi. They upgraded Boohoo (LON:UK:BOO)  and Pets at Home Group (LON:UK:PETS)  to buy. Those shares fell 0.2% and 0.5% respectively.

Boohoo shares have gained over 100% quarter to date, while Pets at Home has dropped 7%.

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