Ratings for both Diageo and Pernod Ricard have been downgraded. Merrill Lynch has reduced both drinks companies to 'sell' from 'neutral' on valuation grounds, according to dealers.

Merrill Lynch highlighted that Allied Domecq, Diageo and Pernod Ricard shares have all been re-rated (against consensus estimates) by 30% over the past year, adding that this re-rating has not been accompanied by any improvement in the near-term trading environment for spirits companies.

Merrill argued that the re-rating across the sector means that valuations have become stretched.