European consumer stock underperformance overdone, buy the weakness: UBS

Investing.com -- Analysts from UBS Global Research in a note said that the underperformance of European consumer stocks has been exaggerated, creating potential buying opportunities. 

Despite challenging market conditions, UBS analysts argue that the current weakness in European consumer equities may be an overreaction, and investors should consider taking advantage of these depressed valuations.

The European consumer market has been in a state of tepid recovery. Although real wages are on the rise, consumer confidence is improving, and interest rates are declining, these positive developments have not yet translated into robust consumer spending or stock performance. 

UBS analysts attribute this sluggish recovery to the lingering effects of recent economic shocks, which have made consumers cautious despite the improved financial landscape.

“We heard little evidence that European consumers are loosening the purse strings. Chinese and US consumers show signs of weaker-than-expected activity as well,” the analysts said.

The underperformance is particularly notable in the Stoxx 600 Consumer Goods and Services index, which has lagged by approximately 30% relative to the broader market. This decline has brought consumer stocks near their lowest relative levels in the past five years​.

Several factors have contributed to the weak performance of European consumer stocks:

1. Price levels and inflation: Although inflation rates have sharply declined, price levels remain significantly higher than pre-COVID levels, which may be causing consumers to delay spending.

2. Sector weakness: The goods sector, particularly durable goods linked to the struggling housing market, has been underperforming. Services have fared better, but recent declines in sentiment indicators suggest that the overall market sentiment is still fragile.

3. Geographical disparities: European consumer stocks typically have about 60% exposure to European consumers, with 20% exposure each to the U.S. and Rest of the World (RoW). Weakness in key markets, such as the U.S. and China, where consumption has been slower than expected, has also weighed on performance.

UBS's Position: Buy the weakness

UBS analysts believe that the current underperformance is overdone. While the recovery in consumer spending has been delayed, they argue that it is not absent. The analysts highlight several key points:

1. Excessive sell-off: Consumer stocks have underperformed by about 30% relative to the Stoxx 600, despite an improving economic backdrop. UBS sees this as an excessive sell-off, creating opportunities for investors to buy into weakness.

2. High potential upside: Among the 47 consumer-exposed stocks analyzed by UBS, 18 are rated as "Buy," with an average potential upside of 52% and total expected returns of 30%. The forward price-to-earnings ratio for this group is approximately 15x, only marginally above the Stoxx 600 average​.

3. Promising stocks: UBS identifies several stocks with particularly high potential returns, including Stellantis (NYSE:STLA) (83% upside), Delivery Hero (87% upside), and EasyJet (LON:EZJ) (85% upside). These stocks represent strong buying opportunities within the consumer sector​.