Barclays has identified several European stocks that it believes could benefit from an environment of falling inflation.
Disinflation - the slowing rate of inflation - is particularly tricky for some companies because their profits are not growing in line with cost pressures.
Inflation in the eurozone fell to 5.3% in July from a peak of 10.6% in October 2022. With interest rates remaining elevated, inflation is expected to fall further towards the European Central Bank's 2% target in the coming months.
The investment bank said its selected stocks, which it called "disinflation winners", are particularly well placed to perform in the current environment, with at least two of the selected stocks expected to rise by more than 60% over the next 12 months.
"European equities posted solid returns in July, with sentiment in the economy improving amid expectations of inflation peaking and growing hopes of a soft landing," Barclays strategists, including Emmanuel Cau, said in an Aug. 15 research note to clients.
While Barclays expects eurozone growth to weaken in the second half of the year, the bank said corporate profits have so far proved resilient. Analysts at the bank said the soft-landing scenario has now become the consensus, leading more investors to invest in value stocks.
The following lines list the 3 "disinflation winners" from Barclays with the biggest gains:
Delivery Hero
Among the highlighted stocks, Delivery Hero, a food delivery company, had the most upside potential. Barclays expects the stock to rise 64% to 63 euros ($68.9) over the next 12 months.
"Delivery Hero, in our view, has the most progressive vision of any delivery aggregator in the EU. It is a space we are positive on, which is reflected in our investment case assessment," Barclays analysts led by Andrew Ross said in an Aug. 10 note to clients.
The investment bank analyst also added that investors would "welcome" and "see it as a bonus on top" if the company sold or consolidated divisions in smaller markets where it operates.
Lloyds Banking Group
Barclays expects shares in British lender Lloyds Banking Group to rise 64% to GBP0.70 (USD0.89) over the next 12 months. Shares listed on the British stock exchange are usually quoted in pennies instead of pounds.
The investment bank expects the higher interest rate environment to benefit Lloyds as the lender should generate more profits by widening its net interest margin.
"We see a sustained tailwind from rising rates and greater resilience to liquidity/deposit outflows. Coupled with declining provisioning risks, we expect higher profits to lead to higher capital returns," Barclays analysts led by Aman Rakka said in a July 27 note to clients.
Lloyds shares also trade in the U.S. - Lloyds Banking Group plc $LYG
Legal & General
Barclays analysts are also bullish on the U.K. life insurance sector and expect L&G shares to rise 42% over the next 12 months.
The investment bank expects the higher interest rate environment to be beneficial for insurers as they can meet their long-term liabilities with less initial capital expenditure.
"The direction of travel for UK life insurers is generally positive from a macroeconomic perspective, but the pace is slow," the analysts, led by Larissa van Deventer, wrote in a note to clients on 4 August.
"Given that most UK life insurers offer attractive returns and strong cash profiles, we like L&G for its room to grow."