When it comes to coining a group of investment ideas, we aren’t strangers to the use of an acronym or two. First we had BRICs – Brazil, Russia, India, China – thought in the 1990s to be the four most important of the emerging markets.
The 2010s tech revolution then brought us the FANGs, a group of American mega-cap companies not dissimilar to the Magnificent Seven that dominated the US stock market in 2023.
Most recently we’ve seen the advent of the GRANOLAS, a group of eleven – yes, eleven – companies in Europe that also dominate their market sectors. Like the BRICs, the GRANOLAS are a construct of Goldman Sachs.
In aggregate, the GRANOLAS now account for around 21% of Europe’s STOXX 600 – approaching the Magnificent Seven’s current share of the S&P 5001.
What are the GRANOLAS?
The GRANOLAS are all household names in Europe and far beyond. Like the Magnificent Seven in America, Europe’s GRANOLAS have spearheaded a major surge in stock markets over the past year. That spells strong structural themes coupled with higher-than-average valuations.
The GRANOLAS encompass multinationals in the healthcare, technology, consumer staples and consumer discretionary sectors that derive their revenues principally from the US and the rest of the world. In terms of domicile, they’re also fairly reasonably spread across Europe.
| Domicile | Price-to-earnings ratio | Price-to-book ratio | |
|---|---|---|---|
| GSK | UK | 13 | 4.7 |
| Roche | Switzerland | 15 | 6.0 |
| ASML | Netherlands | 46 | 26.7 |
| Nestlé | Switzerland | 22 |
6.7 |
|
Novartis |
Switzerland | 23 | 4.1 |
|
Novo Nordisk |
Denmark | 46 | 36.2 |
|
L’Oreal |
France | 36 | 7.6 |
|
LVMH |
France | 26 | 6.4 |
|
AstraZeneca |
UK | 35 | 5.4 |
| SAP | Germany | 52 | 4.6 |
| Sanofi | France | 20 | 1.5 |
Source: Bloomberg, 17 April 24
The table above suggests that most of the GRANOLAS are not excessively valued at present, despite the high quality of their earnings. The GRANOLA tech companies – ASML and SAP – along with the largest European company of all – Novo Nordisk – are more highly rated, broadly in-line with America’s Magnificent Seven.
How the GRANOLAS got here
The GRANOLAS have two interdependent features in common. They are all among Europe’s largest companies and they have all performed well over the past few years. Their success has been driven largely by consistently robust operational performances coupled with a strong demand for blue chip investments.
Make no mistake, the GRANOLAS are exceptional companies. Novo Nordisk has soared to become Europe’s most valuable company, as demand for its innovative Wegovy weight loss drug has severely outstripped supply. ASML – the main chip-etching machines supplier behind Nvidia – has also seen its sales and shares rocket. LVMH – famous for its Louis Vuitton handbags and Tiffany jewellery – has also boomed this year amid growing sales in China.
The GRANOLAS stand to benefit further as index tracker funds attract more investors and because passive algorithmic trading in the stock market often favours momentum. As more indexed funds get bought worldwide, so the GRANOLAS can expect to see additional inflows.
What of the future for the GRANOLAS?
Acronyms applied to groups of investments have largely stood the test of time, but not without alterations. The BRICs were amended to the BRICS at one point to include South Africa, and Russia has long since lost its label as a viable investment proposition.
The FANGs – Facebook (now Meta Platforms) Apple, Netflix and Google (now Alphabet) – were augmented to the FAANGs on the inclusion of Amazon. Then they were amended to the FAANG+ companies, through the inclusion of Microsoft, Nvidia and Tesla.
The Magnificent Seven equates to this latter group minus Netflix, which was deemed to have fallen by the wayside somewhat post Covid.
Talk today revolves around a possible Fab Four – Amazon, Meta Platforms, Microsoft and Nvidia – these having demonstrated the most resilience during the recent retracement of tech stocks.
On the face of it the GRANOLAS have a good chance of remaining intact for a considerable time, given that they exist across a broad range of established market sectors, most of which have far less volatile track records than technology. The GRANOLAS mostly promise stable returns going forward.
An attractive way of diversifying away from the Magnificent Seven
Such has been the growth of the Magnificent Seven, investors in globally diversified funds may now have heavy weightings in them. Global index tracker funds highly popular among Fidelity’s personal investors certainly do.
The GRANOLAS are comparable to the Magnificent Seven in the sense they have a proven ability to drive returns in a large stock market area and benefit from long term trends that tend to be independent of short-term economic ups and downs.
The investment outlook remains strong
Europe has a unique blend of attractions, including the world’s largest consumer single market; a high exposure to emerging markets through exports; a wealth of internationally recognised consumer products and luxury brands; and a world leading position in greenhouse gas avoidance measures.
The traditional drag compared with the US has been the banking sector. US banks fairly consistently delivered superior returns following a period of higher US interest rates between 2016 and 2019. They have continued to do this, largely because they benefit from higher levels of fee-generating corporate activity.
Today, European stocks trade at an overall discount of about 35% to their US peers, based on the amounts companies are expected to earn over the next 12 months2.
Meanwhile, earnings themselves are currently forecast to return to growth this quarter on a year-on-year basis (+2.8%). Earnings growth is anticipated to accelerate thereafter – to 9.1% then 18.5% in the last two quarters of the year3. In Europe’s case, premium returns don’t necessarily come at a premium price.
Sources
1 STOXX, 08.04.24
2 MSCI, 29.03.24
3 I/B/E/S data by Refinitiv, 16.04.24
