The bias towards tech giants in the US stock market is well known. Less appreciated is that European markets are now dominated by drug manufacturers.
Healthcare accounts for a quarter of the Stoxx Europe 50 index, almost as much as the nearly 28% IT represents in the S&P 500. Five of Europe’s top 10 companies by market value are now producers of drugs: Novartis,
Sanofi and Novo Nordisk from Denmark.
This trend is not new, but it was boosted by this year’s pandemic slowdown, which highlighted the social relevance of the pharmaceutical industry as well as its generally recession-resistant profit profile. A vaccine that AstraZeneca has licensed from the University of Oxford is one of the pioneers in the battle against Covid-19.
The rise of healthcare is one of the results that emerges from an analysis of the largest European companies and their development over the last decade and a half. Another is the dominance of Switzerland. Since 2018, the top three companies on the continent have all come from the famous stable alpine nation: Nestlé,
Roche and Novartis. In 2004, when FactSet registrations for the Stoxx Europe 50 index began, the top three were all British: BP,
HSBC and Vodafone.
The UK market has a preference for banking and oil and gas, industries that ruled the business world 15 years ago but are now so out of favor that they don’t even make the top 10. Appleof
the market value exceeded that of the entire FTSE 100 at the start of the month.
European markets have also been marked by the meteoric boom in the technology sector, albeit in a modest way. The top five companies in the Stoxx Europe 50 now include SAP, the German enterprise software giant, and ASML, a Dutch company specializing in microchip manufacturing equipment. Both are leaders in their respective niches, but cannot match the breadth and depth of American giants in the face of consumers like Alphabet and Amazon..
Meanwhile, network providers such as Vodafone and Telefónica,
which drove European stock markets into the technological frenzy of the late 1990s, continue to hemorrhage into today’s value.
An unlikely beacon of stability is Nestlé, Europe’s most valuable company for 10 of the past 12 years. While its US counterpart Kraft Heinz was punished for excessive cost cuts amid sweeping changes in consumer tastes, the Swiss company continued to generate profits from a globally diverse portfolio ranging from infant nutrition and from dog food to coffee and Kit Kats. The consumer brand in general is a strength of European companies, especially in the luxury sector. China’s appetite for yesteryear jewelry has propelled luxury conglomerate LVMH Moët Hennessy Louis Vuitton into the top 10.
There are mixed lessons here for those hoping for happier days from European stocks, which have underperformed US stocks almost continuously since the financial crisis of 2009. Healthcare should continue to benefit from demographics, but the region is still more exposed to problematic industries such as oil and gas than the United States.
The elephant in the room – or not in the case of Europe – remains the tech sector. Controversial investors who want to bet that 2020 marks the last breath of a tech bubble like 2000 would do well to buy a European tracking fund. Most will prefer to be more selective.
Write to Stephen Wilmot at [email protected]
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