In a move that was largely expected, the European Central Bank (ECB) announced on October 17, to cut interest rates by a quarter point, bringing the deposit rate down to 3.25%. This marks the first consecutive rate cut since 2011 and is a clear indication of a global cutting cycle.

The ECB’s decision is seen as a response to the current economic climate, in which inflation is expected to rise again before eventually declining to target levels. While the headline inflation rate is currently below target, the core rate is higher. The ECB has also stated that it is not committing to a particular rate path, suggesting that future decisions will be made on a case-by-case basis. The rate cut is also part of a broader effort to reduce the ECB’s balance sheet and scale back its pandemic emergency programs. This move is seen as a sign that the ECB is confident in the European economy’s ability to withstand the withdrawal of stimulus measures.

European Equities Show Resilience Despite Economic Slowdown

According to a report by Lazard Asset Management, the European economy is showing signs of stalling, but the equity market remains resilient. Despite the European Central Bank (ECB) cutting interest rates and indicating a “declining path,” this could serve as a tailwind for European equity prices over the near term.

The report notes that the ECB’s rate cuts, combined with the Federal Reserve’s cut in US interest rates, could provide a supportive environment for European equities.

European equities have remained resilient despite the economic slowdown, avoiding any significant declines. This is unusual, as typically, stock markets perform poorly when faced with flagging economic activity and interest rate cuts. However, the ECB’s rate cuts have not been the only unusual aspect of the current market environment.

The report suggests that the falling cost of capital could provide support for certain cyclical parts of the market, such as chemicals and commodity producers, where valuations have become overly discounted. Additionally, the report notes that companies are engaging in more shareholder-friendly behavior, including strategic spin-offs, share buybacks, and healthy dividend payments.

Norges Bank Investment Management on Market Trends and Central Bank Policy

In an interview with CNBC on October 23, Trond Grande, Deputy CEO of Norges Bank Investment Management, shared his insights on the current market trends and the potential impact of the central bank’s monetary policy decisions on the portfolio.

Grande noted that the past quarter has been quite eventful, with significant volatility in July and August, followed by a rate cut by the US Federal Reserve in September.

When asked about the potential impact of further rate cuts by central banks, including the Fed, the European Central Bank, and the Bank of England, Grande stated that it depends on how much of this is already priced into the market. He believes that with inflation coming down and unemployment not rising dramatically, it’s likely that central banks are heading for a soft landing. As a result, further rate cuts shouldn’t be a big surprise to the market, and therefore, shouldn’t have a significant impact on the portfolio.

Grande was also asked about his views on the European banking sector, particularly in light of potential mergers and acquisitions. While the European Central Bank’s rate cuts may seem counterintuitive, Grande believes that a flattening yield curve and potentially even a steepening yield curve could be a big tailwind for financials and banks in general. This could be a bullish sign for European banks, despite the ECB’s rate cuts.

The conversation also touched on the tech sector, which has had a phenomenal ride in recent times, driven in part by the hype around AI. Grande cautioned that while these companies are large and have robust earnings, they’re also priced for further growth. To defend their current pricing levels, they need to show economic growth, sales growth, and increasing margins. Grande advised investors to be careful and consider the potential risks in this sector.

As the global economic landscape continues to evolve, the European market’s resilience and potential for growth make it an exciting space to watch. With that in context let’s take a look at the 8 best European stocks to buy according to hedge funds.

Our Methodology

To compile our list of the 8 best European stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the 25 largest European companies. We then narrowed our choices to 8 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of hedge fund sentiment, as of the second quarter.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

8 Best European Stocks To Buy According to Hedge Funds

8. Aon plc (NYSE:AON)  

Number of Hedge Fund Investors: 54  

Aon plc (NYSE:AON) is a global professional services firm headquartered in London, specializing in risk management, insurance, and reinsurance brokerage. The company provides a wide range of services such as employee benefits consulting and data analytics, helping businesses manage their risks. Aon plc’s (NYSE:AON) strategic acquisitions and continuous growth have strengthened its position as a leader in the insurance brokerage industry.

On October 17, NFP, a company of Aon plc (NYSE:AON) and a prominent international insurance brokerage and consultancy, announced its acquisition of IHI Group, a Dublin-based advisory firm specializing in financial planning, healthcare, and general insurance. The acquisition is set to strengthen NFP’s position in Ireland’s health insurance broking industry. This acquisition aligns with NFP’s goal to enhance its expertise in the health and wellness benefits sector, and IHI Group’s leadership in Ireland’s health insurance broking market will enable NFP to provide superior consultancy and solutions to clients.

Aon plc’s (NYSE:AON) diversified business model includes commercial risk solutions, reinsurance solutions, and health and wealth solutions. The company’s recent acquisition of IHI Group is expected to drive significant revenue and cost synergies. Aon plc (NYSE:AON) also has a strong market position, with a leading market share in the global insurance brokerage market.

7. Trane Technologies plc (NYSE:TT)  

Number of Hedge Fund Investors: 57  

Trane Technologies plc (NYSE:TT) is a global company focusing on solutions for sustainable heating, ventilation, and air conditioning (HVAC) systems. The company is known for its energy-efficient products and services, which help reduce greenhouse gas emissions.

Trane Technologies plc (NYSE:TT) has been experiencing robust growth, as demonstrated by its Q3 earnings report. For the three months ended on September 30, the company reported an 11% organic revenue increase and a 21% year-over-year growth in adjusted EPS. This solid performance has led the company to raise its full-year guidance, anticipating an adjusted profit of $11.10 per share for 2024, up from the previous expectation of $10.80 per share. The company also achieved a backlog increase from $6.9 billion at the end of 2023 to $7.2 billion, indicating strong demand across its product lines. Additionally, the company has revised its revenue growth target to 11% for the full year, compared to the previously projected 10%. For Q4, the company expects approximately 7% organic revenue growth and an adjusted EPS of $2.50.

The rise in global temperatures due to climate change is driving increased demand for HVAC systems, as homes and businesses seek effective solutions to manage extreme weather conditions. With temperatures reaching record highs globally, cooling systems have become a necessity rather than a luxury, benefiting HVAC companies. This trend is likely to persist, providing a sustained demand for Trane Technologies plc’s (NYSE:TT) portfolio of cooling solutions. Moreover, the company’s products also meet the ESG standards by offering advanced energy-efficient systems that contribute to reduced environmental impact.

Trane Technologies plc’s (NYSE:TT) Americas commercial HVAC segment grew nearly 20% year-over-year in Q3, driven by increased demand for heating and cooling systems in commercial buildings. The company’s cooling solutions are also in high demand by data centers that require precise and reliable cooling systems to manage substantial heat loads generated by servers. As AI technologies proliferate, the need for advanced data center infrastructure is expanding, benefiting the company’s offerings in this space. The company’s high-tech cooling solutions, including its Thermo King and Frigoblock brands, are particularly well-suited to meet this demand and provide the company with a significant growth opportunity in the data center market.