Investors have taken a lukewarm reception to earnings from some of Europe’s best-performing companies, suggesting more neglected areas of the market are showing up on their radar screens, particularly as interest rate cuts become more likely.
Europe’s two most valuable companies, ASML and Novo Nordisk, were hit hard on the day the results were released. ASML lost $45 billion in four sessions and Novo suffered its biggest two-day fall in 18 months. On Tuesday, Ferrari fell almost 5%, its biggest daily drop in two years.
However, their shares’ slide has less to do with disappointment with the numbers and more to do with a pause after record gains that pushed valuations to the point where these popular stocks appear vulnerable to profit-taking.
So while investors are booking profits in big stocks, they are looking for opportunities elsewhere. The gradual recovery of the European economy and the prospect of lower interest rates in the region by June make low-valued and under-owned stocks an ideal hunting ground.
“It’s all about positioning,” said Angelo Meda, head of equities at Italian private bank Banor SIM. “Certain scenarios that have guided the markets need to breathe a little.
Over the past two months, Europe’s utilities and real estate sectors have moved ahead of the market, but remain the two worst-performing sectors year-to-date. ASML and Novo Nordisk lagged the market during this period.
STOCKS THAT LIKE INTEREST RATE CUTS IN THE LINE OF SIGHTS
Stock pickers are betting that a reduction in borrowing costs could boost shares of rate-sensitive utilities, seen as a substitute for bonds, and real estate, which also benefits directly from falling rates. rate.
Undervalued small caps, which suffered during the rate hike cycle due to their greater exposure to floating rate debt, could also see a turnaround.
Over the past decade, utility companies have traded on average at par with the overall market valuation. Today, they are at a discount of 10%, according to LSEG Datastream estimates based on a measure of invested capital. Real estate now commands a 12% premium, less than half the average 30% premium.
Being so cheap could make them less exposed to potential declines, as uncertainty over the direction of U.S. interest rates weighs on markets.
In addition, these sectors are heavily discounted, which exposes them to possible short covering in the event of a market downturn.
“Positioning has rarely been this extreme. I think a rotation will take place. It could be violent and will inevitably reward laggards,” said Alberto Tocchio, head of European equities and themes at Kairos Partners SGR.
“Materials, utilities and small caps are the three sectors that I would start to overweight. And we have already started to do that in our funds,” he added.
SIGNS OF FATIGUE
Meanwhile, in another example of high-flying stock fatigue, European defense stocks have moved sideways since suffering their biggest daily decline in a year ago. is a month old, mainly due to concerns about their valuation.
The loss of steam in the very crowded European markets is having echoes on Wall Street. Berkshire Hathaway reduced its stake in Apple this month, but Warren Buffett was full of praise for the iPhone maker.
More generally, cheap valuations are one of the reasons given by those who prefer Europe to the United States, in the hope that it can improve its poor historical performance.
Among them, Emmanuel Cau, a strategist at Barclays, noted last week, however, that equity flows into Europe remained subdued, suggesting sentiment is still cautious.
However, he said “the continued high focus on quality, growth, technology and the United States leaves room for expansion to regions, sectors and styles that have been left behind.”
On Wednesday, Barclays raised its utilities weighting to market-weight, citing the potential for price caps and stabilizing gas prices. She said small caps were likely to benefit from broadening market leadership.
(1 dollar = 0.9283 euros)
