Key Takeaways
- There have been large differences in performance between Morningstar country indexes this year.
- During earnings season, the fair value estimates for some of the largest companies in the US and Europe were revised upward.
- Among sectors, utilities and financials were overvalued, while real estate and communication services were the most undervalued.
It’s been a strong year so far for European stock markets, with the Morningstar Europe Index up 15% in euros in the year through October. But this rise masks significant differences between countries within the European market: The Morningstar Spain Index was up 45% over that period, while the Morningstar France Index rose just 13%.
At the stock market low in early April, both the US and European markets were trading at a discount to fair value of more than 15%. This gap has shifted since, with the US market trading at a price/fair value ratio of 0.99, very close to fair value estimates. The European market also recovered, to a valuation of 0.96, indicating that it remained 4% undervalued as of Oct. 31.
Magnificent Seven Stock Fair Values Increased
There was a notable change in the price/fair value ratios of key stocks in the US market during the last days of October. This is explained by upward revisions to fair value estimates for some of the largest US companies. Morningstar analysts increased their fair value estimates for Nvidia NVDA, Apple AAPL, Amazon AMZN and Alphabet GOOG. In Europe, there were fewer such increases among large caps in October. Major stocks with fair value estimate increases included ASML ASML and Novartis NOVN.
Which Investment Styles Are Undervalued in Europe?
The valuation gap between value and growth investment styles has narrowed considerably since the beginning of the year. They were trading at very similar price/fair value ratios at the end of October, with growth at 0.96 and value at 0.95.
There was also a narrowing in valuations between large and small companies: Large European companies were trading at a price-to-fair value ratio of 0.96 at Oct. 31, while small companies were trading at a valuation of 0.93.
Which Are Europe’s Cheapest and Most Expensive Stock Markets?
Between European countries, meanwhile, valuations vary drastically. The cheapest stock market was still Denmark, undervalued by 23%. Its main stock, Novo Nordisk NOVO B, which accounts for 41% of the Morningstar Denmark Index, was even cheaper than a month earlier, trading at a price/fair value ratio of 0.69 versus 0.75.
The most expensive country-level stock market, Spain, became even more overvalued in October. The Morningstar Spain Index was trading at a price-to-fair value ratio of 1.11, an overvaluation that is explained by the heavy weighting of the financial sector.
Looking at the valuations of the different European sectors, the financial services sector and utilities were slightly overvalued, with a price/fair value ratio of 1.03. Among the largest banks, Banco Santander SAN was trading at a premium of 22%, while Italy’s largest bank, UniCredit UCG, was trading at a premium of 13%.
In the utilities sector, the three largest European companies, Iberdrola IBE, Enel ENEL, and National Grid NG., were trading at a price/fair value ratio of 1.16, 1.10 and 1.05 at the end of October.
By contrast, real estate was the cheapest sector, with an undervaluation of more than 20%, followed by the communication services sector, trading at a price-to-fair value ratio of 0.87. The two largest companies in the sector, Deutsche Telekom DTE and Prosus PRX, were each trading at a 22% discount.
