Economies and markets don’t always move in tandem, and valuation can be an important driver of investment opportunity. Europe in 2024 is a prime example, according to new insight from Morningstar Indexes that analyzes Morningstar’s range of European sector and industry indexes.
While the European economy is struggling to grow 1% after an extended period of stagflation, the Morningstar Developed Markets Europe Index has risen nearly 11% (in euro terms) through the end of May. Helping explain the disconnect is the fact that the majority of revenues for Europe’s public companies are sourced outside of Europe, according to Morningstar estimates. Analysis reveals massive differences between sectors and industries in Europe when it comes to both performance and geographic sources of revenue.
And Morningstar experts see further equity market opportunity in Europe for investors as we enter the second half of the year.
"In many ways, the European economy sits in 'Goldilocks' territory.' It's weak enough that the central banks should not be concerned about overheating it by cutting rates. At the same time, it still has some life left in it, judging by recent data points showing upticks in mortgage lending and service industry activity,” said Michael Field, Europe market strategist with Morningstar Equity Research.
Field sees particular opportunity for investors in European economic sectors, which are currently undervalued when company-level fair value estimates from Morningstar Equity Research are aggregated. These areas include financials, healthcare, consumer cyclicals, industrials, utilities, energy, and consumer defensive.
![2024 Index IP 17 EMEA Sectors Mstar Chart.png](https://images.contentstack.io/v3/assets/bltabf2a7413d5a8f05/blt96591195344e6635/665e4a4902ed7f7131e82ccd/2024_Index_IP_17_EMEA_Sectors_Mstar_Chart.png)
Morningstar Indexes Strategist Dan Lefkovitz underscores the value of analyzing Morningstar’s European sector and industry indexes in explaining the disconnect between the macroeconomic backdrop and equity returns, as well as mixed fortunes across market segments. “Sector leadership is cyclical. Sentiment waxes and wanes; macro conditions change; innovation disrupts; and business fundamentals shift,” said Dan. “While future sector dynamics are uncertain, what’s likely is that they will diverge from the past.”
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