The Granolas and beyond: Europe’s driving force

Like the US’s ‘Magnificent Seven’ or the FAANGs before them, Europe has its very own collection of super stocks: the Granolas. These are a handful of companies that have led European markets in 2023. The worry is that the market has become excessively reliant on their success or failure, but we believe many of these titans have longevity.

The Granolas comprise 11 index heavyweights - GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L'Oréal, LVMH, AstraZeneca, SAP, and Sanofi¹. Unlike their US equivalents, which are focused on technology (and specifically AI), they are diversified across multiple sectors, providing exposure to the health care, technology, consumer staples and consumer discretionary sectors, across several countries. They draw their revenues from across the world, including Europe, the US and elsewhere.

The concern with the US ‘Magnificent Seven’ is that their share price growth has, in some cases, outstripped their earnings growth, leaving them looking expensive. By contrast, the Granolas are significantly cheaper, with European markets generally out of favour compared to their US peers.

These stocks are popular for a reason. They have many compelling characteristics, such as consistent dividend growth, a strong competitive position, pricing power, earnings stability, cash generation and strong balance sheets. These characteristics are particularly valuable in periods of uncertainty: economic and market volatility has helped draw investors to these companies.

However, it is vital to keep an eye on valuations. Passive flows can distort prices for large index stocks and these companies now form 25% of the Stoxx Europe 600², almost as high as the Magnificent Seven in the S&P 500. For the time being, however, valuations do not look stretched, and a number of the Granolas feature in our portfolios.

Granolas alternatives

That said, there are opportunities outside the Granolas that have similar attributes but are trading on lower valuation multiples. For example, we are finding a number of consumer discretionary companies we like, even though it was one of the best-performing sectors in 2023. We own luxury goods names LVMH and Hermès.

The management team at Hermès has created some of the most coveted products in the world through a combination of scarcity and quality excellence. This has afforded Hermès considerable pricing power even as household incomes have been squeezed. In turn, LVMH owns a fantastic portfolio of brands and operates across a wide range of end markets including fashion, alcoholic beverages, perfume, retail, as well as luxury hotels.

It is also worth noting that Europe has its own AI story. Much of the hype in 2023 was around US companies developing large language models such as OpenAI with ChatGPT, or providing the chips needed to run them. Europe has a group of companies that have been quietly using these emerging technologies to develop new products that are already benefitting their customers. In our view, they haven’t been getting the investor attention they deserve, which has resulted in the European-listed beneficiaries trading at more attractive valuations.