From the Mag 7 to the Granolas
International equities are in the midst of a bull market with the main indices in the US and Europe reaching new all-time highs. Since the low of 3,577.03 points on October 12, 2022, the S&P 500 index in the US has rallied by almost 45%, in the process surpassing the previous all-time high of 4,796.56 points on January 3, 2022.
The stellar returns generated by a handful of companies led a prominent US investment bank to describe them as the ‘Magnificent Seven’. The companies forming the Magnificent Seven are Alphabet, Amazon, Apple, Meta Platforms (Facebook), Microsoft, Nvidia and Tesla. These companies accounted for the large majority of the overall gains of the S&P500 last year.
The semiconductor company Nvidia has undoubtedly produced the most spectacular returns in recent years, having gained 239% in 2023 and a further 80% in 2024, placing it as the third largest company on the US stock market behind Microsoft and Apple.
Nvidia is undoubtedly one of the main beneficiaries of the AI revolution due to its production of the world’s best high-powered processing chips. The company is estimated to control about 80% of the high-end AI chip market with its customers including Microsoft, Meta and Amazon.
A few weeks ago, Nvidia published its quarterly financial statements showing spectacular growth once again. During the past 12 months, total revenue doubled to almost US$61 billion, and its profits jumped to over US$30 billion. At a recent conference, the company’s founder and CEO said: “This is the beginning of a new industrial revolution. This is about the production, not of energy, not of food, but of intelligence. And every country needs to own the production of their own intelligence.”
During the first few weeks of 2024, apart from Nvidia, there are another three companies (Meta Platforms, Microsoft and Amazon) that collectively have been responsible for more than half the S&P 500’s total return. On the other hand, Tesla and Apple rank as the underperformers in recent weeks, with Tesla being the worst performer in the entire S&P 500 in 2024 amid concerns of weakening margins and increased competition. In fact, there are some commentators who are now referring to the more restricted group of US stocks as the ‘Fab 4’.
Meanwhile, in Europe, another investment bank created the acronym ‘Granolas’, encompassing 11 companies across Europe with distinct characteristics, including solid earnings growth, high and stable margins, sustainable dividends, as well as strong balance sheets. These companies are ASML, AstraZeneca, GlaxoSmithKline, LVMH, L’Oréal, Nestlé, Novartis, Novo Nordisk, Roche Holding, SAP and Sanofi.
With a combined market cap exceeding US€2.6 trillion, these 11 companies represent circa 25% of the market cap of the STOXX Europe 600 benchmark index and accounted for 60% of the gains registered in 2023.
There are six pharmaceutical companies within the group (namely AstraZeneca, GSK, Novo Nordisk, Novartis, Roche and Sanofi), two technology companies (ASML and SAP), two consumer discretionary companies (LVMH and L’Oréal), and Nestlé, which falls within the consumer staples sector.
In the midst of the euphoria surrounding AI, it should not be surprising that the Dutch-based company ASML attracted a lot of investor and media attention in recent months. ASML is a global supplier of semiconductor production equipment that plays a critical role in the growth of AI. The company’s market cap surpassed €300 billion, placing this as the third largest among the ‘granolas’.
However, the Danish pharmaceutical company Novo Nordisk is probably one of the major surprises over recent months as it has become the largest company in Europe with a market cap of almost €550 billion (larger than the size of the Danish economy), surpassing LVMH in Europe, and Visa and Tesla in the US. The share price of Novo Nordisk rallied following a surge in demand for its weight management and diabetes drugs.
Although these 11 companies form an important weighting in the STOXX Europe 600 benchmark index, they are not overly dependent on the eurozone economy, with less than 20% of their revenues coming from Europe. These companies have a global footprint with good profit margins and high barriers to entry.
The investment bank that coined the acronym ‘granolas’ described them as a group of “internationally exposed quality growth compounders”. Naturally, their performance is influenced by global market dynamics, including currency movements, tariffs and geopolitical developments with China given the exposure of LVMH, L’Oréal and ASML to the Chinese economy.
It may be a surprise to many that over the past few years, the Granolas have performed very much in line with the Magnificent Seven. Obtaining exposure to both sets of companies can be easily achieved through a variety of exchange traded funds managed by the largest asset management companies around the world.
It would be unwise to assume that both the Magnificent Seven and the Granolas will continue to produce such stellar returns also in future years. However, these companies are dominant players in their respective sectors and should continue to produce robust shareholder returns.