Key Takeaways
- France is now the cheapest major European market, with its price-to-fair-value ratio falling to 0.85 in September.
- The Netherlands bucked the trend, with its ratio rising from 0.82 to 0.85, while most European markets became more attractively valued.
- Real estate, consumer cyclicals and communication services were Europe’s cheapest sectors, while basic materials and financial services remained slightly overvalued.
European equities became more attractively valued in September as the Morningstar Europe Index fell 2.5% during the month. The decline pushed the index’s price-to-fair value ratio from 0.96 at the end of August to 0.94 at the end of September.
European stocks are now cheaper than they were at the start of the summer and cheaper than they were at the start of the year.
Europe Gets Cheaper, but Not Everywhere
The improvement in valuations was broad-based across European markets in September, with the Netherlands the only country in the table to move in the opposite direction. Its price-to-fair-value ratio rose from 0.82 in August to 0.85, making Dutch equities somewhat less attractive on this measure.
France is now the cheapest major market, with its ratio falling from 0.91 to 0.85. Germany moved from 0.92 to 0.88, while the UK declined from 0.94 to 0.91.
France and Germany were the worst-performing major European markets in September, with both the Morningstar France Index and the Morningstar Germany Index falling by more than 4% during the month.
Denmark also became notably cheaper, with its ratio dropping from 1.01 to 0.94. Norway and Belgium moved closer to fair value, ending September at 1.02, down from 1.08 and 1.05 respectively.
Spain remained among the most highly valued markets despite a decline in its price-to-fair-value ratio from 1.14 to 1.10. Sweden was similarly expensive at 1.10, although its ratio edged down slightly during the month.
Consumer Cyclicals Become Even Cheaper
The sector data shows an even wider dispersion in valuations. Real estate is the cheapest European sector, with a price-to-fair value ratio of just 0.78. Consumer cyclical stocks follow at 0.81, while communication services stand at 0.83.
Basic materials, which was trading above fair value in August, also moved closer to fair value, with its ratio falling 5.1% to 1.03. Financial services followed a similar pattern, declining to 1.02 and energy ended the month at 0.97.
The only sector moving in the opposite direction was technology. Its price-to-fair value ratio increased from 0.81 to 0.85, a 4.8% increase. Technology nevertheless remained one of the most undervalued sectors in Europe at the end of September.
Fair Value Changes for Some Large European Companies
The valuation data for individual companies shows that changes in fair value were relatively limited during September. Six of the 50 largest European companies recorded a change in Morningstar’s fair value estimate during the month.
The largest increase was for TotalEnergies TTE, whose fair value estimate rose to EUR 86 from EUR 77, an increase of 11.7%. Shell’s SHEL fair value increased to GBX 3,810 from GBX 3,580, or 6.4%. BP BP. also saw its fair value rise from GBX 530 to GBX 590. Iberdrola’s IBE fair value estimate also increased, to EUR 18,0 from EUR 17.40.
Two companies in the pharmaceutical sector saw slight reductions in their fair value: Novartis’s NOVN fair value fell from CHF 109 to CHF 105, and Novo Nordisk’s NOVO B from DKK 285 to DKK 275.
What Is the Morningstar Price/Fair Value Ratio?
The price/fair value ratio measures whether a stock is cheap or expensive by dividing the price of a stock by Morningstar analysts’ fair value estimate as of the most recent market close. A ratio above 1 indicates the price is higher than Morningstar’s estimate of its fair value; a ratio below 1 indicates that it’s lower.
