What actions will drive European stocks in Q4?

But that’s the big picture. Michael Field, Europe Market Strategist at Morningstar, says how you do it will depend a lot where you were invested and in what. This will not change as the final quarter of the year progresses.

“All in all (the market) is up over 20% in the last twelve months,” he says.

“But in that sense it was really mixed across all sectors. If you had invested in consumer, which has not been a great place to be all year, you would have only gained 1.5% or 3% depending on your holdings in consumer staples versus defensives.”

Energy was also disappointing, although Field points to financial services as one of the standout sectors amid a recovery from the March 2023 banking crisis, which ignited sentiment in European financial services and ultimately led to the purchase of Credit Suisse by UBS.

“If you had invested in financial services, which (came back) from the banking crisis, you would have made a third of your money back within 12 months, which is pretty phenomenal,” he says.

UniCredit: The one to watch?

Will James, manager of the Morningstar Silver-Rated Guinness European Equity Income Fund, says the financial sector continues to face tailwinds from the effects of rate hikes after decades of negative interest rates.

So far this year, the fund has returned 11.13% to investors, outperforming the European ex-UK equity category by 4.24%.

James now believes the sector will be a performance driver for European equities in Q4. But there are also risks.

“The key risk for them is if economic growth slows aggressively and people start to worry about another potential mini-recession,” he says.

“But now they seem to be making enough money to be able to get away with it.”

UniCredit UCG is not in his fund, but James expects the Italian bank to drive growth in the European financial sector for the rest of the year.

Morningstar Key Values ​​for UniCredit

• Economic moat: None
• Estimated fair value: EUR 35.00
• Term dividend yield: 4.58%
• Morningstar rating: 3 stars
• Sector: Financial Services
• Morningstar Uncertainty Rating: High

Why Unicredit? The Italian bank’s share price was supported by its move to build a larger stake in German rival Commerzbank CBK, a deeper tie-up that represents a significant shift in European financial services M&A activity.

The move is being engineered by new chief executive Andrea Orcel, who wants to use the bank’s €6bn (£4.9bn) extra cash to transform the business’s outlook.

“The reason you’re starting to see M&A come back is because someone like UniCredit wants to use the excess capital they’ve generated over the last 18 months to get bigger,” says James.

“Although, in my experience, when banks get bigger, it’s always a bit more dangerous.”

Can France make a comeback?

And what about France’s CAC 40 index, which lagged its European peers due to the fallout from the country’s July snap election. This meant an increase in support for the far right which eventually led to the formation of a fragile governing coalition led by the far left.

“It’s up a bit, but it’s still below pre-summer ratings,” says Field.

“It was the furthest behind among different countries, while the rest were close to their all-time highs.”

What happens next will certainly depend on the performance of luxury stocks LVMH MC, Kering KER and Hermes RMS. LVMH and Hermes are France’s biggest companies by market capitalization but, like other cyclical consumer goods companies, have been hit hard by weakening consumer sentiment and a pullback in sales in China.

“Part of the reason why cyclicals have performed so defensively has been because everyone got upset about China,” says Tom O’Hara, portfolio manager of the Morningstar Janus Henderson Continental European Fund. So far this year, this fund has returned 4.8% to investors, underperforming the Europe Ex-UK share category by 2.1%.

“But the Chinese government, after making positive noises last week about repairing their economy, has helped some cyclical factors come back.”

China also announced a series of interest rate cuts, additional stock market funding and economic support for its battered real estate sector.

“We’re now at the point where it’s (the start of) Q4 and the mood has changed slightly; to the hope that we can move past the negative Chinese sentiment,” says O’Hara.

“And maybe the US Federal Reserve hasn’t left interest rate cuts too late and so the underlying economy is headed for a soft landing. for some of these consumer discretionary areas like luxury.”

Rajesh Tanna, portfolio manager of the Morningstar Silver-Rated JPM Global Unconstrained fund, also believes that LVMH, which owns luxury brands Dior, Givenchy and Tag Heuer, shows good long-term potential. So far this year, the fund has returned 16.7% to investors, outperforming the Global Large-C Growth Equity category by 7.3%.

“What you have now is a slower growth phase, but you have a business with the best brands in the world trading at 19 times earnings,” he says.

“LVMH will benefit from consumption not only in China but also in the US. Many other markets are now starting to become quite notable in size, such as the Middle East and India”.

Consumer staples still on the sidelines

While the tide may be turning toward luxury, however, Field is unsure if other consumer staples brands will experience the same Q4 win.

“Consumer staples companies are great at riding through inflationary price increases. People will pay only because they need those goods,” he says.

“But in the shorter term, when inflation has been high for two years and counting, the consumer is really stretched, (especially) when they’re paying 7% more every year for goods.”

The tourism sector, which is not experiencing the same slowdown in demand as other consumer staples, also faces the prospect of its fortunes changing in Q4, with price wars possible this winter as companies fighting to secure their summer holiday in 2025. purchases from a consumer focused on value for money.

Who will win the Q4 race?

But there is already a company in the running.

German industrial multinational Siemens SIE is a stock that many believe will continue to rise through the end of the year. Its share price is up more than 9% year-to-date and is up 34.6% over the past 12 months.

The reason for this was the increase in infrastructure spending globally. The firm recently announced a $60m (£45.1m) budget to build a US factory that will develop high-speed trains to transport commuters between Los Angeles and Las Vegas.

Telecom giants such as Telefonica TEF and Deutsche Telekom DTE are also benefiting from infrastructure as a theme as investors sell cyclical stocks to buy into telecoms for their stable earnings and low volatility. Share prices of both companies are up 21.29% and 33.02%, respectively, year-to-date.

The biggest story of the year is yet to come. For James, European equity investors cannot ignore the impact of political stories on the continent.

“There is no imminent danger from the political news,” he says, “but it just shows that there is still fragility in these countries from a political perspective. 10 years ago everyone was worried about Italy and Spain, but now they are more concerned about France and Germany.”

“Most importantly, in a month we have an election in the US and that will generate a lot of feeling,” he says.