Speaker 0:
welcome to this latest instalment of market moves. I'm joined here by Michael Field, European equity strategist at Morningstar Michael. Welcome to the programme. Thank you, Rory. Good to be here. Let's start with Europe and more precisely, European stocks. What are valuations looking like at the moment? Because we have those bargain prices in September. What's going on now?

Speaker 1:
September really was that time for investors when you had this huge margin of safety. If you got involved there, you know a lot could go wrong and you still would be. You wouldn't be under water in terms of the price that you paid.

Speaker 1:
Obviously, since then, kind of market conditions have improved somewhat. Inflation seems to be coming down again. Economic indicators are improving, and then as a result, investor confidence has improved also, and evaluations have kind of gone up as a result. So what we're seeing now is valuations across Europe close to where we think they're kind of fairly valued once again.

Speaker 0:
And how important is confidence? Because we have the banking crisis. Really, if you can call it a crisis, but

Speaker 0:
we wouldn't call it systemic is maybe a lack of confidence systemic.

Speaker 1:
Um you know the banking crisis is a is a is a deep topic. Um, there's some issues there are kind of in house view Is that with Credit Suisse specifically, those were kind of very much specific issues to that bank and that for the most part, we view the banking sector as well capitalised. There shouldn't be any natural issues going forward, but yes, certainly

Speaker 1:
things are about confidence, especially when you're asking investors now to look 69 months ahead of a view in the economy. That's all confidence based

Speaker 0:
and earnings season is coming soon. How are European earnings looking like compared to the rest of the world and with the UK as well?

Speaker 1:
I think a lot of companies are coming under pressure over the last year. Inflation has been running really high for quite a long time now. OK, it's on the wane. But companies are reporting for the last quarter now, and that's inflation numbers maybe 10% or so

Speaker 1:
and different sectors and different companies have dealt with that in different ways, some better than others. And the outlooks going forward now are kind of the particular part that investors will be paying attention to what those companies are saying about the next three or nine months in terms of how they're going to manage with the economic situation, the way it is

Speaker 0:
and what sectors are really leading the way in Europe, ones in particular.

Speaker 1:
So if if we look at the the graph here, I think this kind of shows you where valuations stand and is reflective of where the sectors have come from in the last 69 months and what you're seeing is

Speaker 1:
the defensive sectors, you know, consumer defensive utilities. These kind of relatively safe places, as investors have viewed them, have been where investors have been putting a lot of money over the recent times. Um, the question now is, is there enough confidence from investors to invest more in the more cyclical sectors? Is there that faith in the economy for the next kind of 12 months that they're happy to to move their money to these sectors and hopefully, hopefully see those companies perform? But

Speaker 1:
there's obviously dangers involved, particularly in something like a consumer sector, with consumers being cash strapped inflation, Wage increase is not always coming through as people would have liked, so That's the big question now, I think, and

Speaker 0:
the average price for value metric there is that kind of the number that you'd expect it to be on.

Speaker 1:
Um, I think this is, you know, for as long as I've been looking at this, I think it's rare to see all these sectors undervalued, right? You've always Usually there's kind of, um, some sort of mixture that some are overvalued. Some are undervalued. So the fact that everything is undervalued slightly at the moment suggests that there's still an opportunity there for investors. But obviously, some things like consumer cyclicals, financials, they're trading at huge discounts to where they should be so kind of highlights the opportunity. I think

Speaker 0:
let's move away from stocks that look at interest rates. And the ECB said more rate rises are on the way.

Speaker 0:
Is anything giving them confidence at the moment when they look at the broader market there? What are they thinking at the moment?

Speaker 1:
I think the main thing on their minds is where is inflation and how they're going to bring that back down to their target level and how long that's going to take. And if you listen to what the ECB are saying. They're taking a rather conservative viewpoint on it. And I think they're trying to message correctly to markets, to be aware that there could be two more interest rate increases and that markets need not to get over confident. Um, too early before they really tackle that inflationary problem

Speaker 0:
and looking at the US, the inflation data that came out recently. Are they looking at it with a similar mindset or how are they looking at their interest

Speaker 1:
rates? I think all central banks are focused on those inflation rates at the moment. Certainly, I think with the US, there's some kind of nuances with that market that maybe they saw a lot of labour inflation coming through last year, whereas in Europe we should probably

Speaker 1:
expect to see a little bit more of that later this year again, which is more of a problem for us and also the Fed, you know, raised rates quite quickly and quite hard. Um, and as a result they feel that maybe the problems getting under wraps that they kind of know where they need to go from here, I think,

Speaker 0:
and looking at the the ECB rate and the Bank of England. Base rate. What in that graph is screaming out at you?

Speaker 1:
I think you know what's striking is just how low for how long it was, you know, that you had in in Europe in DC b at least you know, 0% interest rates for such a long period of time. And then suddenly we're faced with this reality where they're back up to 3.5% or so or even higher in, you know, with the Bank of England that it's just this kind of new reality. Perhaps that OK,

Speaker 1:
you know, a lot of people are suggesting that this might be the peak rates, but at the same time, how likely it is that we get to 1% or down to 0% again? Um, you know, from here it looks quite unlikely.

Speaker 0:
And if inflation stays quite stubbornly sticky, is the Fed or anyone else going to abandon any notions of cutting rates?

Speaker 1:
No, I think the short answer is no. I think the markets would probably like it that way. We did a webinar just recently, and we asked investors when or if they thought there was going to be, um, rate decreases across Europe later this year, and I was surprised with the results. More than 80% of people said they think there is going to be a rate decrease at toward the end of the year, which I think people could be in for a little bit surprise if indeed, like you said, we have that persistent inflation

Speaker 0:
and is everything priced in now, would you say or is there still a bit of uncertainty?

Speaker 1:
I think ultimately we live in a really uncertain world. We had a period of a lot of stability after the global financial crisis for such a long period of time. And in the last five years, we've had, you know, pandemics. The war in Ukraine, supply chain problems, all of these things. And and now, you know, close to 10% inflation still in the UK. So I think

Speaker 1:
it'd be very hard to predict a straight line path out of all these problems from here, you know?

Speaker 0:
Yeah, Michael, Thanks very much.

Speaker 1:
Thank you.