‘Granolas’ from Europe drive record rise in shares – 02/26/2024 – Market

Eleven companies dubbed “Granolas” drove European shares to a record high this week, with their outsized contribution echoing the better-known “Magnificent Seven” in the US.

The acronym was coined by Goldman Sachs for pharmaceutical companies GSK and Roche, Dutch chip company ASML, Nestlé and Novartis of Switzerland, Danish drug maker Novo Nordisk, L’Oréal and LVMH of France, AstraZeneca from the United Kingdom, German software company SAP and French healthcare company Sanofi.

Over the past 12 months, the group has accounted for 50% of gains in the Stoxx Europe 600 index, which hit a new high on Thursday (22), and around half of all mergers over the past five years.

The data suggests that Europe is experiencing a similar phenomenon to the US, where fund managers are increasingly concerned about the narrowness of a rally led by technology companies like Nvidia, which has reached a valuation of US$2 trillion ( R$ 10 tri) on Friday (23).

“The big ones keep getting bigger,” said Peter Oppenheimer, Goldman’s chief global equity strategist and head of macro.

“This idea that you’re getting significantly more concentration in the U.S. market has gotten massive attention, but it’s also being reflected in other markets,” Oppenheimer said. He expected Granolas to drive “almost all” of the Stoxx 600 companies’ combined revenue growth in the coming years.

Granolas as a group are up 18% over the past 12 months, outperforming the Stoxx 600’s 7.5% rise over the same period.

Over the past three years, the Granolas have performed similarly to the US Magnificent Seven — a group of technology stocks made up of Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia — and with much lower volatility, although they have not kept up with the pace in the last 12 months.

Granolas is more diverse than the Magnificent Seven’s exclusive technology focus. The best performer over the past 12 months is Novo Nordisk, driven by investor enthusiasm for its weight-loss and diabetes drugs, and is up 69%.

The Granolas’ share of the Stoxx Europe 600 index rose to 25%, approaching the Magnificent Seven’s 28% weighting in the S&P 500. However, the European grouping, which has a combined market capitalization of around $3 trillion ( R$15 trillion), is surpassed by its US counterparts, which have a combined value of around US$13 trillion (R$65 trillion).

Granolas is cheaper than Magnificent Seven in terms of earnings multiple, trading at 20 times next year’s forecast earnings, compared to Magnificent Seven’s 30 times. Both sets of companies are widely seen as having strong balance sheets and healthy margins, and — despite European companies’ reputation for focusing on dividends — invest similar shares of cash flow in research and development and capital expenditure.

Some market participants believe there is too much focus on the performance of the biggest companies, pointing out that major indices have long tended toward concentration at the top and that smaller stocks often perform even better.

“People are obsessed with the size of these companies,” said David Souccar, portfolio manager at Vontobel. “[Se] a small-cap (companies with low market capitalization) appreciates in value by 50% over five years, it will not create as much value as a stock [Granolas] or Magnificent Seven in absolute terms, but my return is better,” he said.

The U.S. has become increasingly dominant among global stock markets since the financial crisis, as near-zero interest rates have boosted valuations of technology groups with strong earnings growth.

Over the same period, post-crisis regulation and the fall in oil prices since their 2008 peak have hurt the banks and energy groups that make up a large portion of European stock exchanges. “But now there are pockets of Europe that are doing very, very well,” Oppenheimer said.

Recent interest rate hikes have helped strengthen the position of larger companies at the expense of cyclical and long-duration assets, analysts say, as banks become more cautious about lending to smaller, supposedly riskier borrowers.

Most analysts do not expect European and American markets to become less concentrated any time soon. They point to the rise of passive index-tracking funds, which automatically pump money into the biggest stocks.

Slowing economic growth could hurt smaller, lower-quality companies, although a so-called soft landing for the global economy could lead to a broadening of the bull market.

“It’s very difficult for me to see a trend reversal. The rise in passive investing will continue to inflate [ações de megacap]”, said Joachim Klement, head of strategy at broker Liberum.

But top-heavy indexes could be vulnerable if the biggest companies start to disappoint investors’ high expectations, Klement added. When index giants “make operational mistakes, things can go sour quickly.”