Key Takeaways
- European stocks’ positive performance in June means they are now fairly valued.
- German stocks are the most undervalued in Europe thanks to the steep discount of heavyweight SAP.
- Consumer cyclicals remains one of the cheapest market segments, while technology is the most expensive.
European stock markets have continued their recovery from the lows of Iran-war driven disruption. The Morningstar Europe Index gained 2.4% last month after rising by 3.0% in May. Although all European equity markets posted gains last month, there were significant differences from one country to another.
The Dutch stock market was again the top performer last month, with a return of 12.58%, thanks to a 24.3% rise in ASML Holding ASML, which accounts for around 50% of the Morningstar Netherlands Index. At the bottom of the ranking, just like in April and May, was the Norwegian stock market with a decline of 9.4% in euros, affected by Equinor’s EQNR 10.9% decline in euros.
The positive performance of the European stock market has made valuations slightly less attractive at the end of June compared with the end of May. The Morningstar Europe Index now has a price-to-fair value ratio of 0.99, which means that it is fairly valued. There are, however, some countries with a notable undervaluation. This is the case in Germany, where the price-to-fair-value ratio stands at 0.87.
This is partly due to the negative return of the Morningstar Germany Index last month, but also to the steep undervaluation of software giant SAP SAP, whose shares were trading with a 50% discount relative to the Morningstar fair value estimate at the end of June.
By contrast, the Dutch market’s price-to-fair value rose from 0.97 to 1.11 between May and June while the Spanish market’s valuation, the region’s most expensive, rose from 1.11 to 1.19
Last month, the Morningstar US Market Index rose by 1.5% in euro terms, compared with a 2.4% increase for the Morningstar Europe Index. The stronger performance of the European market may explain why it has pulled ahead of the US market in terms of valuation. But another factor has been that the Morningstar fair value estimates of some large American companies have been revised upward during June, including for Micron MU to USD 850 per share from USD 455 and Tesla TSLA, whose estimate rose to USD 425 from USD 400.
In Europe, only UBS Group UBSG has seen its price-to-fair-value revised upward in June, from EUR 34 to EUR 40.
The Most Overvalued and Undervalued European Sectors
Valuations across European equity sectors continue to present a relatively attractive picture. Only three sectors are in overvalued territory: basic materials, financial services and technology.
The basic materials sector traded at a 4% premium at the end of last month due to the overvaluation of Rio Tinto RIO and Anglo American AAL, which were trading at price-to-fair value ratios of 1.23 and 1.81 respectively.
The second most expensive European sector is financial services. The blame lies with Spain’s two largest banks, which are trading at overvalued levels: Banco Santander SAN, with a price-to-fair value ratio of 1.51, and BBVA BBVA, with a ratio of 1.22.
The most expensive sector was technology, which rallied 7.2% last month and traded at a price-to-fair value of 1.08. ASML saw a sharp rise in its price-to-fair value, from 1.15 to 1.43 during June.
Among the cheapest sectors were real estate and the cyclical consumer goods sector, the latter with a price-to-fair-value ratio of 0.85, thanks to luxury group LVMH MC, which is trading at a discount of more than 20%.
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.
