Morningstar analysts have just produced their Europe Equity Market Outlook for Q3, which looks in-depth at a range of industries. They also highlight some top stock picks for each sector. We’ve looked at the report in detail and found three charts that highlight some important market trends.
Overvalued and Undervalued Stocks in Europe
The Morningstar Rating for stocks indicates whether a firm's share prices is cheap or expensive relative to its fair value estimate. Looking at the 10 sectors covered by this chart, it’s clear that there are a big chunk of stocks in each industry that are fairly valued, as represented by the yellow band. But there are significant differences in the number of 5 star (cheap) and 1-star (expensive) stocks in each industry, which makes a difference for those looking to find cheap or undervalued companies or avoid overheated sectors.
In financial services, utilities, basic materials and technology sectors, there are no 5-star stocks at all, and they make up a very small percentage of healthcare, industrials and communication sectors.
Our analysts highlight 5-star Just Eat Takeaway (JET) as an example of an undervalued company in the consumer cyclical sector. Food delivery is expected to be a pandemic trend that is likely to persist. On the flipside, some industries, like basic materials and healthcare have a big chunk of highly overvalued stocks after a strong year for commodities and pharma industries.
European Airport Passengers in 2021
Travel stocks sit within the Industrials sector in Morningstar coverage and our analysts think budget airlines are best placed to take advantage of any uptick in demand in the key third quarter. Indeed, 4-star Wizz Air (WIZZ) is the top pick because of its solid balance sheet ad growth prospects.
“We believe Wizz Air is in the sweet spot of an airline’s life cycle: big enough to matter to suppliers, but small enough to enjoy a substantial runway of profit growth before reaching maturity,” they say.
Still, European air traffic is still substantially lagging the US, where air traffic has recovered to 70% of pre-Covid-19 levels, and there is a risk of another disappointing summer for travel companies. “A recovery in air travel over the important summer travel period in Europe remains highly uncertain as a result of countryspecific travel restrictions, which include quarantine and testing requirements,” say analysts.
Financial Sector Valuations
In the financial sector, more than 90% of stocks are either fairly valued or slightly undervalued, the report shows. Morningstar analysts say that stocks in the wider financial sector have made remarkable progress since the March crash, but are still lagging the broader market, as shown by the dark blue line.
Emergency stimulus measures put in place by governments across the region have helped keep individuals in jobs and companies liquid and solvent, they say. Economic recovery and the possibility of higher inflation and interest rates are also good for banks. Analysts are upbeat on the prospects for stock exchanges in the region and pick out 4-star London Stock Exchange (LSEG), a former stock of the week. “We expect the trend of passive investing and new products related to ESG to remain long-term tailwinds for exchanges,” they say.
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