“After a decade of stunning performance” on Wall Street, global investors are feeling uneasy about the dominance of US stocks in their portfolios, says Sharon Bell in the Financial Times. European equities could offer better value. The energy shock has made the last few years a tricky period for European markets, opening a large transatlantic valuation gap. US shares trade on a price/earnings ratio of over 21, compared with 14 in Europe and around 12 in the UK.
European stocks have at least managed to hold their own this year, says Bastien Bouchaud in Les Echos. The Euro Stoxx 50 index has gained nearly 12% so far in 2024, just a smidge behind the S&P 500. Inflation has cooled faster on the “old continent” than in the US, with the European Central Bank poised to start cutting interest rates as early as June. Easier money usually finds its way into financial markets, which will support share valuations.
European markets: rise of the Granolas
Much as US markets have been driven by the “Magnificent Seven” tech firms, so too a handful of European giants have made the running. Dutch chip specialist ASML has accounted for about a fifth of the Euro Stoxx 50’s gains this year alone. Bank Société Générale has dubbed the outperformers the “Seven Wonders of Europe”, says Jamie Chisholm in MarketWatch. The group includes ASML, pharma group Novo Nordisk, luxury conglomerates LVMH and Hermès, software play SAP and industrials Siemens and Schneider Electric. Many of them also feature in Goldman Sachs’ “Granolas” category, a pan-European grouping of 11 top stocks that also includes UK firms AstraZeneca and GSK.
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The Granolas make up about a quarter of the Stoxx 600 market and contributed 60% of the gain in the year to 1 March, says Michael Fahy in Investors’ Chronicle. The group collectively trades at a roughly 60% valuation premium to the wider European market, but is still on a discount of 30% to the Magnificent Seven. Over three years they’ve broadly “matched the returns of the US tech giants”, but with less volatility. No European firms rise to the trillion-dollar valuations of the biggest US companies, says Jocelyn Jovène for Morningstar. But the Granolas do represent a more diversified grouping than the US tech giants, taking in healthcare, technology and both cyclical and defensive consumer themes.
European stock markets have transformed over the past decade, says Frédérique Carrier of RBC Wealth Management. No longer the preserve of stodgy banks and telecom groups, today's fast-growing technology, healthcare, industrials and consumer discretionary firms together account for 57% of the MSCI Europe ex-UK index, up from 37% in 2011. “Bloated conglomerates” have slimmed down into leaner operators: return on equity rose from 9.8% in 2011 to 13% last year. Europe may lack the dynamism of the US or emerging economies, but investors often overlook the fact that about 55% of revenue comes from outside Europe. “No longer wan and listless... European equities are emerging from their chrysalis with newfound potential.”
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