Investor confidence has fallen to lows not seen since the start of the Covid-19 pandemic due to a proliferation of risks, according to new market analysis.
High inflation, rising interest rates and the war in Ukraine have all increased the chances of a recession in Europe – and left investors understandably spooked.
Today’s Morningstar Equity Market Outlook report points out that European equity markets have fallen each consecutive quarter in this calendar year, making a loss of more than 20% since January.
The American finance giant says current market conditions lead investors to fall back on quality stocks with wide and narrow economic Morningstar Economic Moat Rating ratings.
But Morningstar equity market strategist Michael Field thinks the market is focusing too much on the short-term and overlooking stocks’ long-term potential.
He said: “Despite the worsening macroeconomic picture, our aggregate fair value estimate hasn’t budged materially, meaning attractive upside opportunity remains.
“On a price/fair value basis, the European market is now the cheapest it’s been since the very beginning of the pandemic, with roughly 20% upside from here.
“While recessionary fears across the eurozone are very real, we believe the market is focusing too much on short-term negativity and ignoring the longer-term prospects.”
Morningstar has concluded that current conditions have left sectors undervalued.
With inflation across Europe at about 10% and expected to stay high this winter, investors are having to search for companies that can cope with that type of pressure.
Equity analysts find companies that are managing to mitigate rising costs and protect their profitability – and their stocks offer upside potential.
Current valuations leave all eight sectors that Morningstar covers with upside potential relative to our fair value estimates, with 75% of the coverage in 4- and 5-star territory.
There is also increased opportunity in the consumer cyclical sector, where 80% of coverage is rated 4 stars, and 60% is 5 star-rated.
Morningstar’s analysis of e-commerce shows that apparel stocks like Zalando (ZAL) and Inditex (ITX) are undervalued.
The pandemic helped companies attract new customers for food delivery, but the current financial climate has pressure on share prices.
Morningstar says that means investors need to be selective and look for strong balance sheets and a clear path to profitability, with their top pick being Just Eat Takeaway (JET), which has a 5-star rating.
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