James Gard: The end of the year is fast approaching and there's still a lot of uncertainty about. To make sense of the next few months, I have with me Michael Field. He is European market strategist for Morningstar. Welcome, Michael again. So I've just been reading your Q4 outlook and you are looking at some sector opportunities that have been thrown up recently. So you're kind of keen to focus now on consumer, energy and technology. Do you want to kick off with consumer?
Michael Field: Yes, certainly. So I think there's a lot going on, obviously, as you said, but those are the three that we should be paying attention to over the next few months. They are the three where we're likely to see something kind of big happen. And consumers are very good for stop there. If you look at what's been happening over the last couple of years, we've had really high inflation, almost double digit at one point across Europe. That certainly calmed down, but consumers are still pretty cash strapped. Those mortgage rates are still high, albeit they're coming down. And consumers are kind of stretched as we know. We read about this kind of every day in the press. But we kind of feel that we've turned a corner in some respects. If we look at, you know, earning season coming out now and some of the numbers that we've seen report over the last couple of quarters, a lot of consumer defensive names, for instance, have actually seen volumes increase again, something that hasn't happened in a couple of years. So it seems like as those prices have stopped going up as much as they have done, that volumes are actually going up in place of that, which is a great sign.
Gard: Sure. And you put some of that down to increased marketing activity. And also, they're not having to do shrinkflation or pass on price rises. They're actually, you know, they're focusing on the promotional activities, which seem to be working so far this year.
Field: That's it. So I think, instead of like you said, trying to push prices up and that being their main focus, they've been able to shift that energy towards promotional activity. All those offers you're seeing in supermarkets, trying to encourage us to buy the actual branded goods again, rather than a lot of the kind of unbranded goods, the Lidl, the ALDI stuff that a lot of people have drifting towards over the last couple of years, essentially.
Gard: So this is going to benefit stocks like, for example, Reckitt Benckiser, and Unilever, which have, they have a raft of more expensive branded goods that have kind of struggled in the last couple of years.
Field: Yeah, that's exactly right. And I think some of the alcohol firms as well, the beverage firms, Anheuser-Busch, the likes of these two volumes, they've been seeing volumes decreasing for a while now. But as consumers start to have more money in their pockets, as they start to benefit from those promotional offers that we spoke about in the increased marketing, the hope at least is those volumes should pick up again over the next few quarters.
Gard: Well, let's keep an eye out for that with the earnings reports coming up. I think Unilever reports this week. So moving on to oil. So oil prices are weak. You're taking a contrarian view in terms of oil in that we haven't yet reached peak oil, and it's not easily substituted. That's one of your arguments. So you see some potential for the sector in the near and the medium term as well. And the market doesn't agree with that view. So we do have some undervalued oil companies in Europe. Shell is considered fairly valued, I think, but BP is screening as undervalued.
Field: So, there's two parts to this. One, the long-term thesis, as you said, that we don't think peak oil has yet arrived or we think we're not far from peak oil, ultimately. Whereas a lot of other people in the market, for instance, have pointed to oil declining, oil demand declining from here, which we don't think is the case. We think that, okay, when it comes to EVs and things like this, yes, we're in a slow drift towards that. But in terms of other uses of oils and petrochemicals and other things like this, it's not as easily substituted as you said. So, we think people underestimate the longer-term demand for oil. That's number one. Number two, then, is around the short-term conditions.
And what we're seeing at the moment is OPEC announcing they're going to increase their oil output, which, as we know, is never good for oil prices. And then on the back of that, too, you have a lot of weak data out of China. Okay, they're offering some stimulus now, but it might take a lot more than that. So, all these factors together are kind of pushing down the price of oil, which is in turn pushing down the price of stocks, like you mentioned, the likes of BP, which in the current environment is offering a very attractive dividend relative to the declining yields that you're seeing on bonds. I think that's important to remember also.
Gard: Thinking about tech, I mean, we had a wobble with tech in August this year. We still have to wait for NVIDIA's results in the next couple of weeks. Tech sort of got back on an even keel globally. U.S. stocks in particular. But last week, we had a really big sell-off in ASML. The outlook was much weaker than people expected. The last quarter sales were significantly lower. So, you think that European tech stocks are now screening as undervalued? There is an opportunity for buyers in this market.
Field: So, I think European tech stocks as a whole are slightly undervalued in Europe. I'm not trying to overstate the case here. But you mentioned the sell-off there. And the problem sometimes with sell-offs is the recovery happens, but the recovery doesn't happen equally. Not all stocks that fell off that cliff actually recover again. And ASML is one of those stocks that you rightly mentioned that hasn't fully recovered. It's bounced in the last few days, but indeed, we're still a far way off where it was and indeed, where a fair value estimate is for this stock. And you also mentioned order books. Yes, orders were weaker than expected. But if you look at the rate of growth inherent in the company, it's still phenomenal. So, I think from that perspective, the likes of ASML and a couple other names in Europe still have that really high growth rate and are still a very attractive investment opportunity.
Gard: Sure. I mean, it tends to be a sort of a cyclical low of ASML. The last few years, there tends to be a weakness in the share price. This time of year. And I was reading something about how dependent the global chip makers are on ASML, which is – it's great to bring it back to a moat. I mean, ASML has a really strong moat in that respect, and that no one else in Europe is doing what ASML is doing.
Field: Yeah, I think that's fair. And that's been driving the growth within the company and the resilience within the company for a very long time. So, I think you have to kind of take the longer term perspective here and look at it and think, okay, yes, things can be slightly overstated at times with regard to an AI boom and how much that's going to influence them. But as a company and in terms of how entrenched they are in their own industry and their intellectual capital, I think they're in a great place.
Gard: Sure. This feels like a short-term wobble rather than a significant slowdown. But is this also an element of the elevated market expectations that don't get met, then there's a big sell-off, which we've seen a lot with tech stocks the last couple of years.
Field: I think that's always the danger that when growth expectations get built into valuations and PE ratios and things like this get out of control, that it's very much a finger in the air type scenario as to what the future growth rates for the company is going to be. And then you get led to situations then where investors can be easily disappointed.
Gard: That makes sense to me. So we've got two big events coming up. We've got the UK budget next week following that U.S. election. So we'll have plenty to talk about when we next meet. So looking forward to catching up then.
Field: Absolutely.
Gard: Thanks very much for your time.
