Jefferies downgrades Morrisons ahead of Thursday's results

Jefferies downgraded Wm Morrison to a 'hold' rating after the stock outperformed the FTSE 100 by more than 40% in the year to date.

While the broker did not rule out the potential for more material upside further down the line it said this "requires the ability to construct a more positive industry narrative than we currently feel possible" and nudged its target price up to 225p from 210p.

Morrison, to which Jefferies is a corporate broker, is expected to have had an "uneventful" third quarter when it announces results on Thursday, with like-for-like sales growth forecast to be 1.2%.

The Bradford-based grocer is seen by analyst James Grzinic as the best placed of all UK grocers given the combination of its balance sheet, high freehold ownership and vertical integration advantages.

Mounting inflation from sterling devaluation and re-inflating agricultural commodities is going to be a challenge for the supermarket industry in 2017, though "how this price attrition will be borne by suppliers, retailers and consumers is hard to call at this early juncture".

Competitive dynamics between the UK's grocers are seen as unlikely to subside in the short-term, with goings on at discounters such as Lidl and Aldi worth watching.

"We expect that reducing new space additions from discounters (which should be a foregone conclusion given rapidly deflating trading momentum and falling margins) will unlikely materialise before H2 2017. We expect discounters to stick to current openings in the near term, in the hope that a more pressured consumer could start trading down."