‘Has DeepSeek Changed the Game for European Stocks? Probably Not’

Morningstar’s EMEA chief market strategist Michael Field joins us in the virtual studio to discuss the latest market movements.

James Gard 31 January, 2025 | 12:53PM
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James Gard: Welcome to Morningstar. We’ve already had a dramatic start to 2025 in the market. So, with me today to discuss this is Michael Field. Welcome, Michael. So, Monday we had a big sell-off, but has anything changed in your view of European markets?

Michael Field: So the short answer is no. Obviously, there’s been a huge amount in news flow since Monday and it caused a ripple in European and U.S. equity markets, primarily in the AI related space. I think if you look at the overall markets, they’re still up year-to-date, so that hasn’t caused much of a disruption there. But a lot of the AI names, particularly in the U.S., haven’t since recovered. They’re still trading at a discount to where they were as of last week. Thankfully, in Europe, we’ve had results from some of the big names like ASML, for instance, and their order book growth in Q4 was enough to reassure investors that that growth theme is still alive and well.

Gard: Sure. It was interesting because ASML obviously sold off heavily as a sort of European AI bellwether on Monday, but they bounced back pretty much on Tuesday and Wednesday. So, thinking about your recent column where you said that Europe could finally outstrip America in terms of stock market performance this year, has anything changed, has anything changed that view for you? And does it even strengthen that view in a way? Because if the AI leaders turn into laggards this year, will that narrow the valuation gap between Europe and the U.S.?

Field: Fundamentally, when this whole debacle happened about DeepSeek, we came together all the analysts across Morningstar, both in the U.S. and Europe, and their ultimate view was that DeepSeek is an interesting development, but it doesn’t really change the game for any AI-related plays. And indeed, the kind of derivative plays on AI, the industrial companies that provide the equipment for data centers, et cetera. We haven’t actually taken down any fair value estimates for any of these companies as a result. So, it’s probably a bit early to take a victory lap on the U.S. versus Europe argument for the year. But what I would say is that if you look at the U.S. currently and the MAG7, and other AI-related stocks, there’s still some skepticism by investors. Investors haven’t fully kind of bought into Jevons paradox and they haven’t really fully kind of thought these companies are going to recover over the course of the year just yet. So, if that continues and the MAG7 underperform this year, then certainly Europe has a little bit of a head start.

Gard: Yeah, I mean, the MAG7 have had an amazing run. So, like all bull markets, when it reaches a top, I’m not calling the top, by the way, but through can come off the top of the market at certain times after such strong runs, right? Especially NVIDIA I mean, the results are end of Feb, so we could see a correction if things disappoint.

Field: I think that’s fair. But probably, as I said, a little bit early to start calling that, the growth in the MAG7 is still incredible and in AI-related stocks, generally speaking. So, it’s not the underlying performance my question. It’s more the market’s faith in those stocks. And if that suffers, the share prices will suffer as a result.

Gard: Sure. Yeah. Still early days. Switching tac slightly to interest rates. We just had the ECB cut the rate again. And one of your thesis to this year is that basically, the interest rate differential between the U.S. and Eurozone will help give certain out-of-favor sectors or asset classes, small caps, value stocks, that could help give them a bit of a push this year.

Field: I think so. Look, economic backdrop is always important. It’s one of the factors involved why the U.S. markets have outperformed Europe over the last couple of years, because they’ve had a much healthier economic backdrop. GDP growth in the mid-2% range compared to us where we were struggling with recession just over a year or so ago. So, I think certainly, interest rates coming down in Europe, you’ve had a 25 basis point cut right now. Meanwhile, the Fed have held rates steady. And we’re expecting another 75 basis point cut in the ECB over the course of 2025 or even maybe in the first half of 2025. So, that really opens up the differential between the two in terms of interest rates ultimately.

Gard: Yeah. So, ultimately, that means Eurozone consumers will be able to borrow at cheaper rates and have more money to spend in theory. So, how’s that going to play out in terms of the sectors? You were highlighting consumer defensive as a potential. The sector has had a bit of a bad run, but could that come back this year?

Field: So, I think consumer in general was the sectors that we were highlighting as the laggards. You know, we did highlight them in 2024 and say these sectors are cheap, but the argument with that as well is maybe it’s a little bit early to be piling in on these sectors and that proved correct. If you looked at the performance in 2024, that consumer massively lagged the market in Europe. But like you said, I think the difference in 2025 is that the economic backdrop is more supportive. If indeed we have 100 basis points of cuts maybe in the first half of this year, that really should feed through into more money in the consumer’s wallets and a greater ability to spend on those consumer items, both staples and discretionary items, which should be a big boost for that sector.

Gard: Sure. And usually there’s a time lag between a rate cut and the actual impact in terms of economists talk about six months really. But are there any stocks in that sector that you are particularly keen on?

Field: So, I think certainly in the defensive space, you’ve got the likes of Anheuser-Busch, Heineken, both beer companies ultimately, Reckitt Benckiser on the consumer goods side, general consumer good, all of these massively large companies trading at pretty sizable discounts at the moment. And then on the consumer discretionary side, we still think there’s a lot of value in the luxury space, the online retail space generally, the Zalandos of the world. And then if you want to go kind of further afield from there, you’ve got the likes of UK home builders as well, all of which are trading at pretty sizable discounts currently.

Gard: Sure. The good thing is we have weeks and weeks of earnings to pick through. So, next time we meet up, maybe February, let’s do a sort of run through of what happened and what it means. So, as ever, thanks for your insights, Michael, and see you soon.


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James Gard

James Gard  is senior editor for Morningstar.co.uk

 

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