According to JPMorgan analysts in a July 12 research note, a rise in people’s savings and improved labor markets are among the factors driving consumers to spend. “We note that most recent EU consumer confidence levels have reached multiyear highs,” they wrote. And, while the Covid-19 delta variant may result in new restrictions, the market has already priced in the possibility of reopening stock plays that have “significantly lagged” in recent months, according to the analysts.
JPMorgan said of the US, “[The] US will not be the runaway leader this year, and we have downgraded it to N [neutral].” It is Growth heavy and will likely lag in a Value driven market” — growth stocks are those that are expected to outperform the market, while value stocks are those that investors believe are undervalued.
Among JPMorgan’s top European picks are:
JPMorgan’s top airline picks are budget carrier Wizz Air and British Airways owner IAG. “Despite the significant disruption caused by COVID-19, we see Wizz as a ‘buy and hold’ stock for investors willing to tolerate the volatility of airline investing,” the analysts wrote, adding that the airline aims to achieve 15% year-on-year passenger growth through the mid-2020s.
Meanwhile, when travel between Europe and the United States resumes, IAG is expected to benefit from a “significant boost” — JPMorgan estimated that margins for the route are “higher than the group average.”
The media and the internet
JCDecaux, a billboard company, was “hit hard”. “We see significant opportunity for JCDecaux in further digitalization of its inventory… as this provides a more flexible and targeted product to customers,” the analysts added.
Broadcaster ITV is also a “key” pick, as it “offers an appealing play on a Brexit and COVID-19 recovery,” according to the analysts. JPMorgan expects a “major bounce” in advertising to last 18 months, which will benefit the sector.
WPP, the ad agency group, is a top choice for the bank. The analysts wrote, “Its simplification strategy makes it easier for clients to access its expertise while also unlocking cost savings.”
JPMorgan’s top EU recovery play is Renault. “We believe the reopening of the EU economy will be the next incremental catalyst for the auto sector, leading to strong yoy [year-over-year] production rates supported also by a relatively stable supply chain,” the analysts wrote.
Infrastructure and construction
Vinci, a French firm, is JPMorgan’s top pick in the sector. According to the bank, as one of the top highway concession holders in France, it stands to benefit from tolls as road traffic increases. It also operates airports, which is expected to be a “value driver” following the reopening.
According to JPMorgan, Spanish airport operator Aena is the “cheapest airport stock among our coverage.” ”[It] remains best positioned to recover faster than peers due to its exposure to domestic and European leisure travel,” analysts said.
Food and retail
Because of its e-commerce model, online fashion retailer ASOS is a “key winner as normal life returns,” according to the bank, and it has also chosen the United Kingdom. Associated British Foods is the parent company of the fast-fashion retailer Primark.
According to the analysts, brewer Heineken will benefit from people drinking in bars, and it will be a “leading” beneficiary of Europe’s reopening.
Whitbread, a hotel operator, is likely to benefit from “staycations,” according to the bank, as people vacation closer to home due to international travel restrictions. ”[It] should continue to outperform peers, gaining market share post-pandemic,” the analysts predicted.
In recent weeks, several European countries have moved to reimpose public health restrictions in response to growing concern about the rapidly increasing cases of the highly transmissible delta variant.
The pandemic, combined with renewed concern about an increase in infections, prompted investors to flee to safety earlier this week, before a sense of calm crept back into European markets.
“We really like European infrastructure stocks, so things like Vinci and Eiffage, which are 70% invested in recurring revenue assets like toll roads and airports — which, admittedly, are struggling a little bit at the moment,” Lait said.
“But they are very, very high-quality assets trading on 10 or 11 times earnings, with decent growth rates and great opportunities to invest their surplus cash flow,” he added, referring to an important metric used by traders to frame a company’s stock price in terms of earnings.
When asked what was likely to spark higher valuations for European infrastructure stocks, Lait replied, “I don’t know, because to us it seems screamingly obvious that there is a lot of value in certain sectors in Europe and the United Kingdom.”
“We aren’t investing in these stocks for short-term gains. We’re investing because we believe in the intrinsic value,” he added. “As a result, we intend to hold those stocks for a very long time. If they revalue higher, we may sell them and look for a better opportunity, but it isn’t worth playing for.”
Shares of French infrastructure group Vinci are up more than 7.4 percent this year, while Eiffage, a French construction group, is up nearly 7 percent in 2021.
These stocks, which took a beating during the sell-off, may be due for an oversold bounce.
The stock market is in for a wild ride this summer. According to strategists, a deeper pullback is possible.
“In our opinion, one part of the market, or many smaller parts of the market, are hugely undervalued and simply out of reach for many investors these days, and I believe that will change,” Lait said.
“These European infrastructure stocks have construction arms that are doing a lot of work in renewable energy, renewable energy development, [and] lower-cost energy deployment into buildings around cities.”
Furthermore, Lait stated that he sees private equity opportunities in this space.
“If you compare the assets that are listed in the public market to private equity assets and the types of yields that they are getting there, they are almost twice as valuable in the private market,” Lait said.
“As a result, it would not surprise me if some of these types of assets were taken private in the coming years.”