Concerns over currency exposure have prompted the investment bank Merrill Lynch to take a generally bearish attitude towards the European drinks sector.

A research note said that the bank expects no earnings per share growth across the sector. Its concerns surround estimates that the European beverage industry makes 75% of its earnings before interest, tax and amortisation in non-reporting currencies, making the strong euro and sterling a problem.

The bank has dropped its earnings per share forecast for brewer Heineken by close to 10% and wine and spirits group Pernod Ricard by 5.5%. However, its sell rating on Pernod was a consequence of worries over earnings growth and the belief it will not meet market expectations, rather than because of currency concerns, a research note added.

Merrill also cut its earnings per share forecast for Interbrew 2% for 2004 and 3% in 2005. But the bank reiterated its "buy" rating on the stock thanks to growth since 1999.

Merrill was more hopeful for Scottish and Newcastle, which it believes has less exposure to currency problems, primarily because of its Kronenbourg brand in France. But it maintained a "sell" rating for the UK-based brewer.

And, it did upgraded Allied Domecq to "buy" from "neutral". And, setting a price target of 460 pence, said it believed the company is less affected by foreign exchange fluctuations.