Market Report: Diageo and SABMiller boost as traders bet on interest rates cut keeping Chinese consumers indulging in luxury lifestyle

 

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The Independent Online

Investors shook off the heavy markets hangover yesterday to top up on shares in spirits maker Diageo and brewing giant SABMiller.

Traders were betting that a cut in interest rates would keep Chinese consumers indulging in luxury lifestyles, boosting Diageo, the Smirnoff and Johnnie Walker maker, by 33p to 1,673p and SABMiller by 127.5p to 3,005p.

Anti-extravagance laws introduced last year by China have hit profits at both groups, while the recent stock market turmoil has exacerbated matters, with around 20 per cent of Chinese households’ wealth held in stocks.

Shore Capital analyst Phil Carroll reckons SABMiller’s greater exposure to emerging markets, where currencies have been hammered by foreign exchange movements, means it  will come off worse.

“As an indication, we would expect SAB’s adjusted earnings to potentially come back from growth in the mid-single digits to a decline in the low to mid-single digits,” the analyst said.

However, he thinks Diageo’s underlying sales will be hit harder by the belt-tightening in China as its goods are typically more expensive, hurting growth in the longer term.

After a 10-day losing streak with China growth fears to blame, yesterday’s mini-rally helped the FTSE 100 close 182.47 points or 3 per cent higher at 6,081.34.

Mike McCudden, at Interactive Investor, warned: “China is still under severe pressure and with talk that the US may still raise rates this year, investors could be in for a rude awakening.”

Banking stocks rebounded after “Black Monday”, with Investec suggesting the falls from Barclays, up 11.65p at 256.35p, and rival lender Lloyds, up 3.22p at 76.68p, were overcooked and upgraded its recommendations to buy.

Its banking guru, Ian Gordon, sees some justification for Barclays’ share slump, saying that the City was a bit too excited by John McFarlane’s move to oust Antony Jenkins.

Dairy Crest, the maker of Cathedral City cheese, was 27p sweeter at 595p after Jefferies bumped up its target price to 640p.

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