Investors eye pockets of value in near-record European markets

Bloomberg

With European stocks only just off record-highs, investors have to look harder than ever to find pockets of value.
Companies that can absorb an inflation spike are in hot demand, while many think so-called value stocks are still cheap relative to growth, even after a huge rally. Others see upside potential in laggard sectors like energy and health care, while the UK is a focus for many following a period of underperformance versus its European counterparts.
A 13% advance in the Stoxx 600 Index so far this year has raised questions over how much of an expected post-pandemic recovery is already priced in. But with European firms set for a strong earnings rebound and the region’s stocks still trading at a steep discount to US peers and offering attractive dividend yields, the foundations for further gains are in place. Identifying areas that have yet to fully reflect that potential will be key.
“European valuations, while expensive, are still more attractive than the US,” Seema Shah, chief global strategist at Principal Global Investors, said. “For investors who are interested in the value trade, Europe is the place to focus given its very
significant weighting of value.”
Inflation, or rather, expected inflation, has been the theme of the year so far. Companies that have a sufficient buffer to absorb higher costs could fare best as the recovery progresses.
So-called value, or cheaper, stocks is another pocket where investors see more upside as they have underperformed the rally in more economically sensitive cyclicals. While banks, autos and construction have outperformed this year on reopening bets, other value segments have lagged behind including insurance and energy, and parts of personal care.
“While it may seem as if value stocks have had a strong six months, they have merely begun to mend devastating performance they delivered to investors in recent years,” James Inglis-Jones, manager of Liontrust European Growth Fund, said by email. Investors may look for firms that have beefed up their profit margins via cost cutting, said James Sym, head of European equities at River & Mercantile Group, citing the consumer sector as well as travel and leisure. Linen servicing firm Elis SA is a specific stock that may fall into that category, he said.
Miners have been among the stars of the stocks rally as optimism over an economic rebound, particularly in China, spurred demand for base metals like copper that are used to make everything from door fittings to electric wiring. Energy shares, on the other hand, may still offer catch-up potential.
The pandemic has made companies like AstraZeneca, Pfizer Inc and Moderna Inc household names, thanks to their vaccine efforts. But pre-Covid-19, it was all about oncology: Astra, for example, spent many years transforming itself into a cancer treatment powerhouse.
As the crisis eases, oncology could be a focus again. Astra and peer Roche Holding are among equities that are “cheap compared to their prospects of growth,” Luc Filip, head of investments at Syz Private Banking, said in an interview. The Stoxx 600 Health Care Index only just regained pre-pandemic levels, trailing the broader gauge’s advance of about 4%.
While the UK’s vaccine rollout success has boosted its equities market, predictions of a quick economic rebound and higher interest rates have also pushed up value of the pound. That’s cut the local-currency revenue from exports, leaving Britain’s stocks underperforming their European counterparts. The FTSE 100 Index is up just 8.6% this year compared with the 15% gain of the Euro Stoxx 50.
UK stocks offer some of the world’s highest dividend yields and the market can benefit from the nation’s economic recovery.
Meanwhile, Europe itself may be seen as a pocket of value by some. The Stoxx 600 Index has outperformed the S&P 500 this year, with the region coming back into favour among investors, but some see further gains ahead.

“We continue to promote Europe as a market poised to benefit from higher earnings growth, driven by the re-opening and the region’s pro-cyclical sector weighting,” Grace Peters, EMEA head of investment strategy at JPMorgan Private Bank, said by email. “We find attractive entry opportunities in European mining, construction, semiconductors and financials.”