The European equity market offers promising opportunities for investors in the fourth quarter of 2024 amid declining interest rates and a turbulent Q3, according to Morningstar.

The firm’s Europe Equity Market Outlook: Q4 2024 argued that Europe’s equity market was currently undervalued in an improved macroeconomic landscape.

Investors could therefore find promising prospects in the European equity market, especially compared to the ‘overvalued’ US market.

For investors who held steady in European equities, the payoff was “substantial”, according to Morningstar, up 22 per cent over the last 12 months.

However, these gains were ‘somewhat concentrated’, with sectors like financial services, which were up by a third, taking the lead, while consumer sectors were found to have significantly lagged the market.

In Q3, utilities were up by 9 per cent and communication services rose by 6 per cent, although energy and technology both fell by almost 7 per cent.

Morningstar noted that further cuts to interest rates in the EU and UK were expected in 2025.

While it acknowledged that these cuts alone might not be enough to stimulate significant economic growth, a gradual and steady approach to monetary easing should crate a more positive environment to do business.

Although US stocks had been the ‘star performer’ over the past 12 months, European stocks have been in a “great place” when compared with other uses of cash.

Furthermore, bond yields are falling from the highs seen in late 2023, but they remain elevated relative to the path that interest rates have taken, the firm noted.

“With interest rates expected to keep declining, boosting Europe's economic landscape, equities are poised for strong performance, at a time where the industry is undervalued, especially compared to overvalued US peers,” commented Morningstar European equity strategist, Michael Field.

“Despite recent market volatility, many sectors like utilities and communication services have surged. Although some sectors faced challenges last quarter, this volatility has presented opportunities for the final quarter of this year in areas such as consumer defensives, consumer cyclicals, and energy.”

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