A Bet on Europe Is a Bet on Drugs, Against Tech

Five of Europe’s top 10 com­pa­nies by mar­ket value are now in health care, while none are banks or ma­jor oil com­pa­nies


The skew to­ward tech giants in the U.S. stock mar­ket is well known. Less ap­pre­ci­ated is that Europe’s mar­kets are now dom­i­nated by drug­mak­ers.

Health­care ac­counts for a quar­ter of the Stoxx Europe 50 in­dex—al­most as much as the al­most 28% rep­re­sented by in­for­ma­tion tech­nol­ogy in the S&P 500. Five of Europe’s top 10 com­pa­nies by mar­ket value are now drug pro­duc­ers: No­var­tis, Roche, As­traZeneca, Sanofi and Den­mark’s Novo Nordisk. This trend isn’t new, but it has been tur­bocharged by this year’s pan­demic-driven down­turn, which has high­lighted the so­cial rel­e­vance of the drug in­dus­try as well as its typ­i­cally re­ces­sion-proof profit pro­file. A vac­cine As­traZeneca has li­censed from the Univer­sity of Ox­ford is a front-run­ner in the bat­tle against Covid-19.

The rise of health care is one re­sult to emerge from an anal­y­sis of Europe’s largest com­pa­nies and how they have shifted over the past decade and a half. An­other is the dom­i­nance of Switzer­land. Since 2018, the con­ti­nent’s top three firms have all been from the fa­mously sta­ble Alpine na­tion: Nestlé, Roche and No­var­tis. Back in 2004, when Fac­tSet records for the Stoxx Europe 50 in­dex be­gan, the top three were all Bri­tish: BP, HSBC and Voda­fone.

The U.K. mar­ket has a bias to­ward bank­ing and oil and gas, in­dus­tries that ruled the busi­ness world 15 years ago but are now so deeply out of fa­vor that they don’t even fea­ture in the top 10. Ap­ple’s mar­ket value over­took that of the en­tire FTSE 100 ear­lier this month.

Europe’s mar­kets have also been marked by the me­te­oric rise of the tech­nol­ogy sec­tor, al­beit in a mod­est way.

The five most highly val­ued com­pa­nies in the Stoxx Europe 50 now in­clude SAP, the Ger­man busi­ness-soft­ware gi­ant, and ASML, a Dutch com­pany that spe­cial­izes in equip­ment to make mi­crochips. Both are lead­ers in their re­spec­tive niches, but can­not match the breadth and depth of con­sumer-fac­ing U.S. giants like Al­pha­bet and Ama­zon. Meanwhile, net­work providers such as Voda­fone and Tele­fónica, which led Europe’s stock mar­kets in the tech frenzy of the late 1990s, con­tinue to hem­or­rhage value in the cur­rent one.

One un­likely bea­con of sta­bil­ity is Nestlé, Europe’s most valu­able com­pany for 10 of the last 12 years. While its U.S. peer Kraft Heinz has been pun­ished for ex­ces­sive cost-cut­ting amid sea-changes in con­sumer tastes, the Swiss com­pany has con­tin­ued to churn out prof­its from a glob­ally di­ver­si­fied port­fo­lio rang­ing from in­fant nu­tri­tion and dog food to cof­fee and Kit Kats. Con­sumer brand­ing in gen­eral is a strength of Euro­pean com­pa­nies, par­tic­u­larly at the lux­ury end. China’s ap­petite for old-world fin­ery has buoyed 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 U.S. ones al­most con­tin­u­ously since the 2009 fi­nan­cial cri­sis. Health­care should con­tinue to ben­e­fit from de­mo­graph­ics, but the re­gion is still more ex­posed to prob­lem in­dus­tries such as oil and gas than the U.S.

The ele­phant in the room—or not in Europe’s case—re­mains the tech­nol­ogy sec­tor. Con­trar­ian in­vestors who want to bet that 2020 marks the fi­nal gasps of a tech bub­ble like the year 2000 would do well to buy a Euro­pean tracker fund. Most will pre­fer to be more se­lec­tive.

A lab tech­ni­cian wear­ing per­sonal pro­tec­tive equip­ment takes reagent bot­tles to per­form vac­cine tests at Sanofi’s lab­o­ra­tory in Val de Reuil on July 10.

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