London-listed supermarket retailers rally on broker notes

Bernstein said that where discount retailer Aldi isn't able to maintain price leadership, instead of running loss leaders, it is likely to reduce its branded range.

“This is good news for the big-four for two reasons: firstly it demonstrates that Aldi will not cut prices forever and secondly it improves one of their major competitive advantages – you can get the brands you love.”

Bernstein said Sainsbury's maintains its best-ever pricing on branded goods in November while Tesco relies on 'brand guarantee' to improve price reality but without having to continuously adjust prices.

Morrisons, meanwhile, has made good progress repositioning in branded and own label which is maintained this month.

Sainsbury was the star performer, however, as it benefited from a upgrade to ‘buy’ from ‘hold’ by Stifel, which kept its 300p price target on the stock.

It said Sainsbury is the cheapest of the three large cap UK food retailers on earnings multiples, despite consistently delivering the best operating performance.

It said the market is implicitly pricing in downside to its industry-leading margins.

“We think this is not merited. While we think that the outlook for industry margins is a dull one, we think the chances of a third-party-led significant further correction are slim and, that competitors' recovery efforts will continue to make little impact on Sainsbury's relatively strong underlying sales growth.”

Meanwhile, HSBC upgraded its stance on Morrison to ‘hold’ from ‘reduce’ following a decline of around 18% in the share price since the third quarter trading update.

The bank said the share price drop has taken Morrison out of the FTSE 100, meaning some re-alignment of tracker fund holdings.

“However, in our view, it is the underlying market concerns which have led to the decline in the shares. Discounters are still winning share, Morrison is still repositioning and food deflation (and adverse differential deflation) is continuing,” it said.

It added that new management is doing the right things, but lack of a scale, adverse differential inflation and competition with Asda and the discounters means this might not be enough given the disadvantageous starting point.

HSBC kept a 150p price target on the stock.

At 0930 GMT, Sainsbury was up 4.2% to 251.84p, Tesco was 3.6% higher at 162.60p and Morrison was up 2.5% at 149.30p.