Coronavirus to Have Prolonged Impact on Consumer Stocks, Barclays Says

(Bloomberg) — Expectations that disruption from the coronavirus will be cleared up by the second quarter are “overly optimistic,” according to Barclays (LON:) Plc’s consumer-staples analysts, who on Friday lowered their recommendations and estimates on three sector heavyweights.

For cosmetics giant L’Oreal SA (PA:), the analysts said they wouldn’t be surprised if a full recovery took a year or more, based on how long it has taken the Chinese consumer to recover from previous slowdowns. Distillers Pernod Ricard SA (PA:) andRemy Cointreau (PA:) also have “material exposure” to China, leaving them vulnerable to a prolonged impact from the disease.

“We expect disruption well into 2Q as a base case,” Barclays analysts including Laurence Whyatt and Iain Simpson wrote in a note Friday. “As yet, it is too soon to tell when footfall and spend in Chinese malls and travel retail might return to normal levels.”

Some investors have so far been prepared to look beyond immediate concern over the impact of the virus as evidenced by a 3.8% gain in Pernod Ricard shares on Thursday after the distiller cited the outbreak for a reduction in its forecast of full-year profit growth. Both L’Oreal and Pernod Ricard shares are showing modest gains on the year, while Remy has fallen about 8%.

The Barclays note spurred weakness in all three stocks on Friday, with L’Oreal and Remy being downgraded to underweight from equal-weight and Pernod cut to equal-weight from overweight.

“We have little visibility as to when the virus will be taken under control,” the analysts wrote about the overall situation. “To our minds, reduced earnings visibility merits a lower valuation.”

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