Supermarket wars: Ardevora's Monaco shorts Morrisons but backs Sainsbury's

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Ardevora UK equities manager Gianluca Monaco is shorting Morrisons while remaining long Sainsbury's ahead of next week's results announcement from the former.

The sector has come under pressure in the last year as cash-strapped consumers turn to discount retailers.

Tesco, the UK's largest supermarket, saw shares drop to a ten-year low after it reported a profit warning last week. However, the co-manager of the Ardevora UK Equity fund said Wm Morrison is the supermarket under the most pressure.

He said: “Sainsbury’s is trying to go upmarket, and Morrisons is trying to go downmarket, but Morrisons’ strategy is much more risky, given the big threat is coming from the discount retailers. There is more sense in what Sainsbury’s is trying to do.”

Wm Morrison will report half-year results in August, while Sainsbury’s has already reported total retail sales, including fuel, down 0.3% in the first quarter of the year. It will report again in October.

Monaco is also shorting Cineworld. He said: “It is clear there are limits to what they are doing in the UK so they are trying to expand outside. Investors like the move but we feel it is a step up in levels of risk.”

The Ardevora investment team usually avoids banks because of the opaque nature of their accounts, but Monaco said there has been an opportunity to snap up Lloyds' spin-off bank TSB.

“It is as clean a business as you can have," he said. "It has no legacy issues, Lloyds are paying for its systems and it has been provided with more or less free capital to grow in a market that is crying out for a new lender.”

The team's UK Equity fund has returned 59.6% over the three years to 25 July 2014, compared to a sector average of 34.9%, according to FE.

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