The rise of the S&P 500 in the United States since the beginning of the year is based solely on the performance of a few significant technology firms, as per Syz Group. Building on that, the asset manager observes that the stocks of top 10 large-cap companies or ‘GRANOLAS’* in Europe have played a similar role.
“… it is possible to isolate ten or so very large-cap stocks (over 200 billion euros) that are increasingly attracting the attention of foreign investors…These European ‘super-stocks’ have contributed to the outperformance of the Stoxx 600 (vs. S&P 500 since the beginning of the year),” writes Charles-Henry Monchau, Chief Investment Officer at Syz Group.
Additionally, he claims that these large-cap companies have several characteristics in common. This includes strong balance sheets, rapid earnings growth that is not economic cycle-dependent and high dividend yields.
“Most revenues are generated outside Europe, and many of these companies have dominant positions in ‘niches’,” points out Monchau. Also, he informs that most of Europe’s top-10 companies this year hailed from the luxury, healthcare and consumer sectors. This is in sharp contrast to a decade ago when European markets were essentially dominated by oil, banking and telecommunication companies.
Monchau gives the example of LVMH and Novo Nordisk to inform that 10 European corporations now have a market valuation of over $200 bn. This is compared to only three a decade ago.
“The intrinsic qualities of GRANOLAS have not gone unnoticed by investors. Most of these stocks trade on relatively high price-earnings multiples. Hermes is trading at over 50 times estimated earnings, while Novo Nordisk’s 33 times multiple represents more than double the average P/E for the pharmaceutical sector,” said Monchau.
According to the asset manager, the 5-year sales growth of Europe’s top 10 large-cap companies justifies their substantial valuation premium. It does, however, warn that any decline in their earnings can cause these equities to underperform.
“Another factor that could put downward pressure on valuation multiples is investor rotation toward more cyclical companies in the event of a strong recovery in global growth,” adds Monchau.
View the full insight here.
*acronym standing for GlaxoSmithKline, Roche Holding, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP and Sanofi.
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