Attractive returns and the breadth of opportunities are among the many reasons why investors have historically preferred investing in the U.S. to investing in Europe. One strategist, however is looking keenly at European equities, and notes that “Europe isn’t a boring market.” “There’s a huge number of growth stocks [and investors] just have to dig a little bit deeper than in the U.S. where it’s extremely easy to find the growth names at the moment,” Michael Field, Morningstar’s Europe market strategist, told CNBC Pro in March. “Europe is in an interesting place structurally. If you look at the macroeconomic environment at the moment, there could potentially be a greater tailwind for European equities than those in the U.S.” Europe’s Stoxx 600 index has been climbing. The benchmark is up by 6.05% year-to-date and nearly 17.5% in the past year. Field is now expecting the European Central Bank to cut rates, a move he expects will be a “boost to economic growth and a real catalyst for change within equity markets in Europe.” “You would hope that will translate through to the stock market in terms of company earnings growth in Europe. What you might also see is asset flows potentially switching from other regions, or increasing exposure to European equities, which again, could boost with boost equity market valuations in Europe,” he added. Field’s current investment strategy is to look for defensive stocks across sectors that are trading at a discount. Consumer cyclicals Within the consumer cyclicals space, Field is bullish on British housebuilding company Persimmon . “Trading in 5-star territory, Persimmon offers the greatest upside as housing conditions recover, in our view,” Morningstar’s analysts wrote in their recent Europe equity outlook report. The investment research firm gives stocks a rating of between one and five stars, with a top rating indicating that the shares are undervalued. “Our analysts have been recommending this stock for awhile. They think the stock has further to go from here,” Field said. Among the opportunities he flagged is a positive “structural picture” for homebuilding in the U.K., as there are not enough houses to meet growing demand. “While you might see some kind of short-term downturn, in the longer-term the picture is very positive for the sector,” Field added. Another pick from the sector is the five-star-rated Swiss luxury watch and jewelry label Swatch Group . Field said the luxury sector is a “great” one to be in. “It’s not immune from the kind of consumer downturn, but it is, does have some defensive qualities,” he said, adding that demand for such products, which cater to the high income bracket, remains consistent, even during an economic downturn. Shares in Swatch Group have plunged by nearly 35.5% in the last 12 months, but Field sees potential in the stock. “It does have a very strong brand and it is getting to the point where they’re going to be able to turn this around. “We believe the stock could almost double from here, making it a very attractive, and unusual opportunity in the luxury goods sector,” he said. Financial services Another sector that stands out to Field is financial services. He sees value in payments, which he described as “one of the most undervalued parts of European financial services.” Other segments offering “spot opportunities” include banks and insurance players, he added. Morningstar expects profitability for European banks to remain above the depressed levels reported in the last decade for it does not foresee a return to the negative interest-rate environment that prevailed for most of the previous decade. The investment research house’s top picks in the sector include four-star-rated ING Bank from the Netherlands and British insurance company Admiral Group . Health care Field is also optimistic on the health-care sector, saying it’s “undervalued.” “Our healthcare coverage trades below our overall estimate of intrinsic value. Besides instruments and devices, the remaining healthcare industries look largely undervalued,” he said. The sector has trailed market performance, with valuations looking “interesting” over the last 12 months, Morningstar noted in its recent report. Field is looking beyond headline-makers like Novo Nordisk and sees potential in some lesser-known companies in areas like immunology, oncology and biotech. His top picks to play the theme are five-star-rated: Swedish radiotherapy firm Elekta , German company Fresenius and Swiss pharmaceuticals and diagnostics giant Roche .
‘Greater tailwind than the U.S.’: Morningstar strategist likes these 7 European stocks
Apr 25, 2024
