LONDON (ShareCast) - JP Morgan has lowered its rating on Home Retail Group to ‘underweight’ from ‘neutral’ saying that the Argos and Homebase owner is likely to feel the impact of inflation.

In a review of the European retail sector, the broker said a surge in inflation in 2009 is likely to damage UK gross margins.

“Retailers face a wall of inflationary pressure from raw material and transport price increases, double-digit labour inflation in most sourcing locations and a reduction in export subsidies,” JPM said.

“UK retailers also face a currency headwind, leading to input cost pressure in double digits.”

It continued: “2008 will be sheltered by hedging and forward buying, but the full impact is likely to be felt through 2009.”

JPM said it was downgrading Home Retail, “given its 100% UK exposure and the highest potential impact from inflation.”

However, the broker said that certain stocks had been oversold, such as the jeweller Signet, adding that it was upgrading the H Samuel owner to ‘neutral’ from ‘underweight’. There is also the potential for Signet’s core US market to recover before its UK operations do, it said.

JPM said that retailers with strong European operations such as the clothes retailers H&M and Benetton and the electrical retailer Kesa are likely to see cost pressures offset by currency factors. It keeps its ‘overweight’ rating on the latter.

Cairn Energy led the way in the FTSE 100 Friday morning after Cazenove upgraded its rating on the stock to ‘outperform’ from ‘in-line’ on valuation grounds.

It noted that the Edinburgh-based company has seen its stock price fall by 16% to close at 3,086p on Thursday since hitting a high of 3,681.

Cairn was also boosted by crude prices soaring past $141 a barrel.

ABN AMro has lowered its rating on Wolseley to ‘sell’ from ‘hold’, saying the building supplies group is likely to breach its net debt EBITDA.

The company still faces downward pressure due to uncertainty over its financial structure, worsening prospects in the UK, France and Ireland and rising interest rates.

• News Channel