Jefferies Turns Defensive on U.K. Consumer Names as Income Growth Slows

Key Moments

Jefferies Warns on Consumer Outlook and Valuations

Jefferies has adopted a more defensive stance on U.K. consumer equities, warning that softening disposable income trends are beginning to collide with optimistic sales assumptions and stretched valuations across the sector.

The firm projects that disposable income growth will ease to 1.9% in fiscal 2026/27, compared with 2.6% in the preceding year. According to Jefferies, this deceleration is being driven by slower wage growth, higher unemployment and persistent cost pressures weighing on household finances.

For the first time since early 2023, Jefferies observes that consensus expectations for like-for-like sales growth at major U.K. retailers now exceed its forecast for disposable income growth. The analysts, led by Frederick Wild, wrote: “We are doubtful the obvious way to square this circle – by using some of the build in savings to fund discretionary purchases – will happen,” citing weaker consumer confidence, cooling house price appreciation and tougher year-on-year comparatives as key headwinds.

Sector Valuation Premium Seen as a Constraint

Against this backdrop, Jefferies argues that the strong re-rating enjoyed by several U.K. retail names this year leaves little room for further near-term share price appreciation. The analysts note that leading food and non-food retailers are trading at an approximately 16% premium to the FTSE 100, a level that stands well above historical norms.

In Jefferies’ view, this elevated premium makes it increasingly difficult to justify additional multiple expansion in a market environment characterized by a more subdued spending outlook.

Stock-Specific Moves: Downgrades and an Underperform

Within its more cautious sector stance, Jefferies has reshuffled several stock recommendations. Tesco and Next have both been lowered to Hold, with the analysts pointing to what they consider peak valuations and increasingly demanding trading comparisons following robust share price performance so far this year. J Sainsbury’s remains rated Hold on similar grounds.

Associated British Foods has been cut to Underperform. Jefferies highlights continuing issues at its Primark business, including weaker like-for-like sales, competitive pressure that is constraining margin recovery, and structural challenges linked to its exposure in Europe and the U.S.

The analysts added, “We would look whether to engage more constructively with these names on a long-term view when near-term trading dynamics normalise.”

Marks & Spencer Stands Out as Only Buy

In contrast to the broader cautious positioning, Jefferies continues to favor Marks & Spencer as its sole Buy-rated name and top pick in U.K. retail. The bank sees scope for a further earnings recovery that it believes is not fully reflected in the current share price, and describes M&S’s valuation as undemanding relative to its peer group.