James Gard: Welcome to Morningstar. With me today is Michael Field. So, Michael, last time we met, there hadn’t been a U.S. election. Since then, there’s been a lot of price movement, especially in the European equity markets. Have any sectors been unfairly punished on fears of tariffs? I’m thinking maybe automotive being an obvious example.
Michael Field: So, I think whether they’ve been unfairly punished will be kind of for the future to decide once we get all the facts. But certainly, from what we know at this point in time, some sectors have taken a huge hit. So, automotives, you mentioned, that’s certainly one of them. You’ve seen all those prices, they’ve been kind of depressed to begin with, and they’ve taken a further hit on the back of the U.S. election. From fears that further tariffs will be placed on European auto exports to the U.S., and that should hit companies hard, particularly those European companies with large exposures to the U.S. companies like Stellantis, for instance.
Gard: Sure. I mean, there’s a lot of negativity in the European car sector at the moment, but looking at the valuations, all the stocks we cover apart from Ferrari, are screening as undervalued. I mean, there are potential opportunities there in some areas.
Field: I think so. You said there’s upside there, but that’s probably understating it as well. The scope of the opportunity, some of these names, you’re talking 50%, 60% upside on average across kind of high quality names like BMW, Mercedes, Volkswagen, we know has had its troubles. But indeed, when you see a company of this size with that much upside potential to the equity, it’s probably not the worst kind of investment opportunity to assess.
Gard: Sure. Yeah. Another sector that’s been hard hit has been utilities and particularly renewables. Are any names there, A, standing out as attractive, still, or undervalued, or both?
Field: So I would say the utilities, unlike in some ways, the utilities sector is kind of the opposite of the auto sector. The auto sector almost entirely screens well. You’ve got the vast majority of the stocks with that kind of 50%, 60% upside that I mentioned. Utilities is a total other ballgame. Half the stocks in there trading something around kind of four stars. So that would be very attractive. And you’ve got names like Orsted or RWE, et cetera. And then on the flip side of that, you’ve got other names that are more like two-star stocks, so stocks we think are slightly overvalued at this point. So it’s a completely kind of minefield in some respects. And of those stocks, then, some of them have quite high exposures to U.S. renewable projects, which are where the fear is creeping in that that Inflation Reduction Act might be rolled back. And that might change the economic returns for some of these projects. But it really differs from stock to stock. So that’s one where you really have to kind of dig into the research and try to figure out which stocks are attractive from that perspective. It’s not as simple as buying an index tracker for that sector, for example.
Gard: Sure. I mean, it’s a case of the market is pessimistic with good reason, but we don’t know whether that pessimism is overstated because we don’t really know what’s going to happen next year.
Field: I think that’s fair. And you’re going to have to wait till we get a bit more detail on one, what President Trump actually wants to do with these various tariffs and changes to the Inflation Reduction Act. And then two, what he actually can do, what’s feasible.
Gard: So, as an equity analyst, you get asked to make forecasts for the following year. And they’re hard to make at this time of the year because you really don’t know. Globally, the markets are quite upbeat, especially U.S. markets. But if I were to pin you down, what do you think is going to happen for European equity markets next year? Is it going to be a positive year? Should we just be realistic and expect kind of low single digits in terms of growth? Or could it be a better year for European markets?
Field: So, as the famous Yogi Berra once said, forecasting is always difficult, especially about the future. And looking at 2025, that’s especially true, I would say. So, on the one hand, you have macroeconomic conditions improving across Europe. GDP is in a much better place than it was this time last year. Interest rates are lower and expected to fall maybe another 100 basis points over the next 12 months, which is obviously a big positive. And then inflation’s kind of come down, you know, there, there about 2%. It’s around that target level as well. So, from those factors, we’re in a far better position than we were last year. But then on the flip side of that, you’ve got these huge unknowns now, like tariffs, for instance, that could be placed on Europe. And political uncertainty as well, if you’re reading what’s happening in the likes of Germany at the moment and France also. So, we’ve got a few issues still left to deal with in Europe. So, I would say overall, you should probably see the, you know, the indexes in Europe creep up slightly. We think European equities are still 5% or so undervalued. So, there is some room to grow for those valuations certainly. But, risks remain and you could see some of that risks and some of those volatility creep into markets in 2025. So, I wouldn’t be surprised if we have a pretty positive year, but with volatility.
Gard: Sure. Yeah. I mean, there’s a lot of complacency globally in the terms of expectations of what a Trump presidency will do for markets. There’s already been a big bounce this year in November, December. So, there’s room for disappointment for investors, I think, next year. Everyone, this time of year starts talking about wild cards, i.e. things that the really, really smart people can predict that no one else can predict. I’m not going to, I’m not going to make you predict a wild card. But are there any sort of contrarian unexpected things that we need to look out for next year?
Field: So, I’m flattered that you’d even put me in that boat with all the smart people making predictions. But I think, look, if there’s things people aren’t focusing on very much, it’s possibly China. So, you know, for instance, the U.S. is placing or trying to place large tariffs on China. That’s been kind of well flagged for a while now. But the knock on effects from that on Europe are probably lesser talked about and lesser well known. So, I think we will have to see how that plays out and whether or not further kind of barriers to trade between the U.S. and China could actually kind of strengthen Europe’s hand, for instance, and make China more reliant on Europe is potentially one positive outcome. If I’m going to pull any kind of positive outcomes from something like a trade war. But again, it remains to be seen. We’ll probably get more clarity in the next six months or so.
Gard: Sure. Yeah. And we’ll look back this time next year and think our predictions are completely wrong. But I’m sure yours would be more likely to be right than wrong. Thanks so much for your time and let’s speak in the new year, Michael.
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