From tumultuous early elections in France to anemic economic growth in Germany, European stocks have not been spared serious uncertainty this year.
However, at the start of October, the EuroStoxx 50 reached 5,003.99 points, slowly returning to the heights it last reached in the 1990s. Despite domestic problems, over the past 12 months European stocks have been a lucrative haven for investors, benefiting from interest rate cuts and falling inflation globally;
But this is a general picture. Michael Field, European Market Strategist at Morningstar, explains that your results will largely depend on Or you were invested, and in what. This will not change in the last quarter of the year.
“Overall, the market has grown by more than 20% over the last twelve months.
“But in this context, the results were very mixed from one sector to another. If you had invested in consumer stocks, which have not been very interesting all year long, you would have only gained 1.5% or 3% depending on your stake in consumer staples versus defensive stocks.”
Energy was also disappointing, although Field points out that financial services is one of the standout sectors in a recovery from the March 2023 banking crisis, which undermined sentiment in financial services at across Europe and ultimately led to the acquisition of Credit Suisse by UBS UBSG.
“If you invested in financial services, which have rebounded since the banking crisis, you would have gotten back a third of your money within 12 months, which is pretty phenomenal,” he says
UniCredit: The stock to watch
Will James, manager of the Silver-rated Guinness European Equity Income Fund, says financial stocks continue to face headwinds from the effects of rate hikes after decades of negative interest rates. ;
Year to date, the fund has returned 11.13% to investors, beating its European ex-UK share category by 4.24%.
James now believes the sector will be a performance driver for European stocks in the fourth quarter. But there are also risks.
“The main risk for them is that economic growth slows aggressively and people start to worry about a potential new mini-recession,” he explains.
“But they seem to be making enough money to get by.
UniCredit UCG is not in his fund, but James expects the Italian bank to be the engine of growth in Europe’s financial sector for the rest of the year.
Morningstar key indicators for UniCredit
• Economic Moat: None
• Fair Value Estimate: €35.00
• Forward Dividend Yield: 4.58%
• Morningstar Rating: 3 stars
• Sector: Financial Services
• Morningstar Uncertainty Rating: High
Why Unicredit? The Italian bank’s share price was supported by its decision to increase its stake in German rival Commerzbank CBK, a deeper tie-up that represents a significant shift in M&A activity in European financial services.
The idea came from new chief executive Andrea Orcel, who wants to use the bank’s €6bn (£4.9bn) of extra cash to transform the company’s prospects.
“The reason you’re starting to see M&A come back is because someone like UniCredit wants to use the excess capital it’s generated over the last 18 months to become bigger,” James says.
“Although, in my experience, when banks get bigger, it’s always a little more dangerous.
Can France bounce back?
What about the French CAC 40 index, which has lagged behind other European indices due to the fallout from July’s surprise election and the decline in luxury stocks. This election saw a wave of support for the far right that ultimately resulted in the formation of a fragile governing coalition led by a conservative prime minister in Michel Barnier.
“The stock market has increased slightly, but it remains below its pre-summer valuations,” explains Mr. Field.
“It has been lagging behind among different countries, while others have almost caught up to their historic highs.
What happens next will depend on the performance of luxury stocks LVMH MC, Kering KER, and Hermes RMS. LVMH and Hermes are France’s largest companies by market capitalization, but, like other companies in the consumer discretionary sector, they have been hit hard by falling consumer sentiment and contracting sales in China.
Tom O’Hara, portfolio manager of the Morningstar Bronze-rated Janus Henderson Continental European Fund, says that part of the reason cyclicals have underperformed defensives so much is because everyone has become somber about the issue. of China. Since the start of the year, this fund has returned 4.8% to investors, 2.1% less than its Europe Ex-UK Equity category.
“But the Chinese government, which made positive statements last week about the recovery of its economy, has allowed some cyclical stocks to rebound.
China also announced a series of interest rate cuts, additional financing for the stock market and economic support for its stricken real estate sector;
“We are now at the start of the fourth quarter and the mood has changed slightly; we hope we can overcome the negative sentiment about China,” says Mr O’Hara.
“And maybe the US Federal Reserve wasn’t too late in cutting rates and so the underlying economy is heading for a soft landing. If you put those things together, then it should be pretty good for a cyclical catch-up – and for some of these discretionary consumer sectors like luxury.” ;
Rajesh Tanna, portfolio manager of the Morningstar Silver-Rated JPM Global Unconstrained fund, also thinks LVMH, which owns luxury brands Dior, Givenchy and Tag Heuer, has good long-term potential. Year to date, the fund has returned 16.7% to investors, outperforming its Global Large-Cap Growth Equity category by 7.3%. ;
“It’s a slower growth phase now, but you have a business with the best brands in the world trading at 19 times earnings,” he says;
“LVMH will benefit from consumption not only in China, but also in the United States. Many other markets are starting to gain considerable scale, such as the Middle East and India.
Although the tide is turning for luxury, Mr. Field is unsure whether other consumer packaged goods brands will experience the same victory in the fourth quarter;
“Consumer staples companies are very good at passing on inflationary price increases. People pay simply because they need these products,” he explains.
“But over a shorter period of time, when inflation has been high for more than two years, the consumer is really put under pressure, particularly when they have to pay 7% more every year for goods.
The travel sector, which is not experiencing the same slowdown in demand as other consumer staples, also faces the fact that its fortunes could change in the fourth quarter, with price wars possible this winter as businesses are racing to secure the 2025 summer vacation purchases of a value-driven consumer.
The biggest story is yet to come
But there is one company that is already in a bull cycle.
German multinational industrial company Siemens SIE is a stock that many believe will continue to rise through the end of the year. Its share price has jumped more than 9% year to date and 34.6% over the past 12 months.
Increasing global infrastructure spending is driving this increase. The company recently announced a $60m (£45.1m) budget to build a factory in the US that will develop high-speed trains to transport commuters between Los Angeles and Las Vegas .
Similarly, telecom giants like Telefonica TEF and Deutsche Telekom DTE also benefit from the infrastructure theme, with investors moving away from cyclical stocks and towards telecoms due to their earnings stability and low volatility. The two companies’ stock prices have surged 21.29% and 33.02%, respectively, since the start of the year. ;
The biggest story of the year, however, is yet to come. For James, investors in European stocks cannot ignore the impact of political events on the continent.
“There is no imminent danger in the new policies,” he says, “but it shows that these countries are still fragile from a political point of view. 10 years ago, everyone was worried Italy and Spain, but today it is France and Germany that worry them the most.
“The most important thing is that in a month we will have the American elections and that will greatly influence people’s feelings,” he adds.
© Morningstar, 2024 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered as an invitation or encouragement to buy or sell the securities mentioned. Any comments are the opinion of the author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.
