LONDON: After decades in the shadows of record-shattering Wall Street stocks, a transformation of the eurozone’s index of blue-chip companies looks to have finally set the benchmark on course toward a new high.
Europe may lack a “Magnificent Seven” tech cohort of its own, but a pared-down version of that phenomenon has emerged.
The Euro Stoxx 50 has just hit its highest since 2001, with the latest leg of the surge powered by blowout earnings from the region’s two biggest tech stocks, ASML Holding NV and SAP SE.
Though the Euro Stoxx 50 is about 15% short of its peak, ASML and SAP’s ascent is the latest sign of how the index, once dominated by oil majors and banks, has radically changed.
The nadir for the index came in March 2009. Since then, more than half of its 156% gains can be attributed to just five names: ASML, LVMH SE, SAP, Siemens AG and TotalEnergies SE. Just ASML and LVMH alone have generated nearly 27% of the benchmark’s return.
A glance back to March 2000 shows that telecom stocks like Deutsche Telekom AG and France Telecom SA (later renamed Orange SA), along with Nokia Oyj, were investor favourites, accounting for about 28% of the index.
When the Internet bubble burst and flushed out those names from the top, oil and banking stocks stepped up to carry the baton of market dominance. By July 2007, the index was highly diversified, with no stock exceeding 6% in weighting.
The global financial crisis spurred progressive change in the benchmark, but financials have largely survived to be the biggest industry group, at nearly 20% today.
The Euro Stoxx 50 is studded with global best-in-class companies like LVMH, SAP and ASML, capable of generating the earnings growth and allure that draws investors.
Still, there may be bumps along the road to a record. For one thing, Europe’s heavy reliance on China links its fortunes to those of the world’s No. 2 economy.
“We think Europe is a top pick to play the China story in the developed market space, providing a wide range of cyclical exposure,” Citigroup Inc strategists led by Beata Manthey said.
Investors may prefer to use European stocks as a proxy for China, rather than taking direct exposure, even as government measures to boost the economy improve sentiment.
The eurozone benchmark remains highly international, with less than a third of its members’ revenue generated within the eurozone.
It’s 37% exposed to broader Europe, 22% to North America, 25% to Asia and 16% to emerging markets, according to Goldman Sachs Group Inc strategists.
The Euro Stoxx 50 is still relatively cheap, with its forward price-to-earnings ratio nearly 13 times – 35% discount to the S&P 500 Index. What’s more, the latest phase of the rally has done little to increase valuations, suggesting that the gains have been driven by stronger earnings.
Easing price pressures and looming interest-rate cuts should help too.
“The valuation of European equities remains very attractive,” said Indosuez Wealth Management portfolio manager Laura Corrieras.
“While the level of unemployment has remained stable, disinflation continues at a faster-than-anticipated pace and more and more investors now expect the European Central Bank to reduce its rates in 2024.”
The Euro Stoxx 50 could be about to benefit from some favourable tailwinds provided by its composition.
Firstly, tech is gaining importance among investors, and the sector has yet to breach its record high from 2000, leaving plenty of room for further gains. A soft landing and a peak in rates should support this group.
Secondly, banks are recovering as their profitability improves. Yet, they still trade about 60% below 2000 levels, and 75% below their peak before the global financial crisis.
“Europe remains a good source of diversification from the concentrated valuation risk in US equities which, even excluding the Mag 7, do not reflect the higher-for-longer environment,” said strategists Sarah McCarthy and Mark Diver. — Bloomberg
