A tasty alternative

In my travels, investors ask me how European equities performed so well last year despite the stagnant economy and geopolitical conflicts. Valuations played a large role. Stocks came into the year priced so cheaply that, when things did not turn out as bad as expected, multiples expanded. Another reason is that the Stoxx 600, Europe’s version of the S&P 500, lately has been dominated by a small group of internationally exposed companies coined the GRANOLAS, a tasty acronym for Glaxo Smith Kline, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP and Sanofi. They include stocks in the Health Care, Info Tech, Consumer Staples and Consumer Discretionary sectors.

By now we all have heard the accolades about the Magnificent Seven: the group of U.S. tech stocks that comprise 28% of market capitalization of the S&P 500, exceed the combined GDP of Germany, Japan and India and surged 75% last year while the rest of the index rose 12.3%. But the GRANOLAS have similar weight, collectively accounting for roughly 25% of the market cap of the Stoxx, and most of its gains.

While the European Union is in, or near, a recession, the GRANOLAS have been appetizing because they are global franchises with dominant and innovative products. They compete in both developed and emerging economies and are less dependent on economic growth in Europe. As inflation declines to the European Central Bank’s 2% target, the surprisingly still-strong consumer should support the staples and discretionary sectors, and health care and tech appear solid. That’s a scenario that would fit the GRANOLAS and their industries to a crunchy T.