Article

Should the ‘Granolas’ be part of your portfolio breakfast bowl?

The ‘Granolas’ are Europe’s answer to the ‘Magnificent Seven’. Although less celebrated, their shares have kept pace with the US giants, but are they really a healthy alternative?

| 7 min read

What are the ‘Granolas’?

The US ‘Magnificent Seven’ stocks have grabbed the limelight in recent years. Apple, Amazon, Alphabet, Microsoft, Nvidia and Meta Platforms (formerly Facebook) are all in a race to develop new and enhanced services based on artificial intelligence. Meanwhile, Tesla was also included in this set of market darlings as the business is developing new electric cars fitted with significantly more control technology.

This tech group accounted for a large part of the S&P 500’s 24% rise last year. Yet, a different collection of stocks on the other side of the Atlantic, known as the ‘Granolas’, have bagged investors similar gains without the fanfare. And because they have their primary listings in Europe, a perennially under owned sector, many investors will have missed out on their performance.

The Granolas was first coined by Goldman Sachs in 2020 after the investment back identified GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi as strong having growth prospects. It was a prescient call as this cluster of stocks have indeed gone on to provide outsized returns.

Europe’s success stories

The fact a collection of European stocks has almost kept pace with the much-hyped Magnificent Seven may be surprising given the precarious state of the underlying economy. In contrast to the resilient US, several of Europe’s largest nations are flirting with recession or are already in one.

Europe’s biggest economy, Germany, declined by 0.3% last year and the growth outlook for 2024 has been cut.

The region continues to battle higher energy and transport costs, resulting from the effects of sanctions imposed on Russia after the country’s invasion of Ukraine. Meanwhile, tense relationships with other trading partners such China, alongside still-fractured supply chains following adjustments made during the COVID-19 pandemic, have added to costs and damaged consumer confidence.

Yet it seems the Granolas are built for tough times, and they are benefitting from global rather than local growth. All eleven are giant international corporations thriving in an era where size is a considerable virtue. They have strong margins, limited debt and products that people consistently need or want. This means the potential for strong and relatively stable increases in earnings – of course, they are no guarantees.

Europe’s pharmaceutical industry is enjoying decent growth through operating at the higher-value end of the supply chain. Norway’s Novo Nordisk, for instance, has thrived with the launch of weight loss drugs Ozempic and Wegovy to become Europe’s most valuable company. Besides Novo Nordisk, there’s Roche, Novartis, Sanofi, AstraZeneca, and GSK, so the Granolas are heavily weighted to the pharmaceutical industry. The latter two are primarily listed in the UK, with AstraZeneca also having a Swedish listing.

Meanwhile, French luxury goods giant LVMH, consumer goods company L’Oreal and Swiss food behemoth Nestlé have strong, well-known brands that tend to keep earnings flowing in good times and bad. ASML, a supplier of semiconductor production equipment based in the Netherlands and Germany’s multinational enterprise software company SAP make up the technology component of the eleven stocks.

Flying in the face of Europe’s reputation as an economic laggard, the Granolas have produced strong returns. It just goes to show that good investments can be found in any geography, and the wider economic picture doesn’t always matter. The Granolas are a big reason for gains in the European stock market over the past couple of years despite the continent’s flatlining economy, although the bloc has benefitted from international growth more broadly.

According to BlackRock, around 65% of listed company earnings are derived from overseas compared with 40% in 2010.

What are the risks of Granolas stocks?

Granolas, and European shares generally, could be part of a healthy, balanced diet for an investment portfolio, but it’s important not to get carried away with a particular market or set of stocks.

As is the case with the Magnificent Seven in the US, Granolas have dominated returns in their market. Analysis from Goldman Sachs in February 2024 showed that they were responsible for 60% of all gains in European stocks over the previous year. They account for more than 20% of the value of all 600 companies in the Stoxx Europe benchmark, while the Magnificent Seven make up almost 30% of the value of the S&P 500. Investors may therefore have some similar concerns surrounding the concentration risks in European markets.

Arguably, the Granolas are a more diverse bunch, though. A portfolio made up, or dominated by, the Magnificent Seven, could be more volatile as many of the components are aligned with similar trends, artificial intelligence for instance. Indeed, this has been the experience in the past. As a collective, the Granolas have been less volatile as they span a broader cross-section of the economy.

A reliance on big pharma could be something of an Achilles’ heel, though, with half the stocks residing in that sector. Legislative changes to drug pricing, especially in the important US market, could impact them. The impending American election may also bring difficulties if Donald Trump emerges victorious and his floated idea of 10% tariff on all imports becomes reality. Similarly, greater trade barriers in other markets such as China would spell danger, as it would for markets more broadly.

Ways to gain exposure to Granolas stocks

  • A passive fund or ‘tracker’ offers a straightforward and usually low-cost way to allocate to European shares, including the Granolas. There are many to choose from and our Preferred List includes Fidelity Index Europe ex UK and Vanguard FTSE Developed Europe ex UK UCITS ETF.
  • For an approach more concentrated in the Granolas investors wishing to allocate to Europe could consider the two actively managed funds on our Preferred List in the sector.
  • Blackrock European Dynamic offers flexible, high conviction approach for investing in European companies. Manager Giles Rothbarth leverages the highly skilled analyst resource within the 18-strong Blackrock European team. The fund is concentrated, meaning it invests in relatively fewer companies than the typical fund. This can mean a higher level of risk but more potential for the manager to add value over time if their stock picking is successful – which is not guaranteed.
  • In the Granolas, Rothbarth has continued to shift from Nestle to Novo Nordisk where he has greater conviction in that business’ underlying growth. In fact, at the end of February 2024, the fund had as much as 9.4% in Novo Nordisk, with ASML (6.2%) and LVMH (5.9%) helping to fill the breakfast bowl.
  • Meanwhile, sister fund Blackrock Continental European Income targets a reliable and growing income stream, that is 110% of the yield of the FTSE Developed Europe ex UK index. Manager Andreas Zoellinger’s investment process balances an attractive yield with dividend growth. There is a greater mix of Granola content than Blackrock European Dynamic with Novo Nordisk, Nestle, ASML, Sanofi and LVMH are all in the top ten, although the manager did sell out of L’Oreal by last December. SAP and Novartis are held outside the top ten, while Roche is periodically a candidate for ownership too.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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