Key Takeaways:
- European stocks are the cheapest they've been since the depths of the pandemic
- Despite an abundance of near-term risks, there are opportunities for investors with long-term horizons
Lukas Strobl: We're in the fourth quarter and the air is thick with uncertainty. Rates are rising, inflation isn't really slowing, and there's the surreal prospect of war spilling beyond Ukraine. I'm here with Mike Field. He's Europe's equity strategist for Morningstar, and he just published his outlook for the remainder of this turbulent year. Mike, all this gloom, has it been baked into equity valuations yet.
Michael Field: To a large degree, Lukas, yeah. I think it's very difficult to say with certainty without knowing exactly what's going to happen over the next quarter and what's going to be thrown at us. You mentioned the possibility of war spilling beyond the borders of Ukraine, and there's other such kind of left field risks out there. So it's difficult to say completely, but I think if you look at the valuation of the European market at the moment and the fact that it's the cheapest it's been since the beginning of the pandemic, when we all thought we were going to go into a black period for quite a number of years, with no kind of opportunity coming out of that, you would have to say then that people are being very pessimistic about Europe at the moment. And I think when we look at a stock level and at a sector level, we're seeing so many opportunities at the moment and therefore we kind of conclude that investors are really ignoring the long-term opportunities within those areas and they're just focusing on that short term risk.
Strobl: Talk us through some of these opportunities.
Field: So I think, look, across all sectors we're seeing opportunities definitely in every single area we see, you know, four and five-star stocks-- that's our way of rating whether they're attractive or not-- and that's visible in quite a few areas. But specifically across the sectors, if you look at the moment, consumer cyclicals, it's got about 60% upside to our fair value in Europe; obviously investors are kind of concerned about the risks there. You know, consumers are going to be cash-strapped. Energy prices are rising interest rates, mortgage rates are going to go up as a result of that. So people are concerned around this. But if you look, okay, for example in consumer cyclicals, internet, retail stocks for instance, areas like this that have been pretty robust over the last while and should be in a good position to survive even if we go into a recession, are trading at super low valuations at the moment and that's just one area.
Strobl: On the flip side, any sectors or factors that are still overvalued that you would steer clear of?
Field: So again, I would say that, yes, there are areas that are more highly valued than other areas at the moment. Utilities for example, it's quite a defensive area as is consumer defensive of course. And you can see that those valuations have increased over the last quarter as investors have kind of flocked to that area of safety, somewhere they feel that will still be able to generate revenues and profits, even if we go into a recession. But every single sector in Europe at the moment is actually trading at below its fair value estimates. So even in those areas, like utilities for example, we still see stocks and specific countries where the market is perhaps overestimating the risk on energy caps or government involvement, and things like this. So it's a really interesting time to be looking at equity markets.
Strobl: A lot of strength in defensives then, but that still makes them a viable bet in uncertain times. Of course, this is just a highlight reel of a very insightful report. Check out the link in the transcript below. And Mike, thank you for joining me.
For Morningstar I'm Lukas Strobl.
LINK TO FULL REPORT
