Investing across the eurozone

Article #698 by Edward Rizzo - Published Weekly

A few weeks ago, I published an article providing an overview of the FTSE 100, the UK’s main benchmark index. There are similar benchmarks tracking every equity market around the world.

In Continental Europe, apart from the individual indices tracking the German stockmarket (DAX30), the French market (CAC40), the Spanish market (IBEX) or the Italian stock exchange (FTSE MIB), there is also an index comprising the 50 largest companies within the eurozone. The EURO STOXX 50 Index is a popular benchmark used by many professional investors to track and review the performance of the large European companies operating across the eurozone.

The EURO STOXX 50, which was developed and introduced in 1998, is managed and licensed by STOXX Limited (owned by Deutsche Börse AG) and comprises companies from eight eurozone countries namely Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, and Spain.

The EURO STOXX 50 index is mostly made up of French (36.6%) and German (33.2%) companies followed by the Netherlands at 14.8%. The most influential sector within the index is ‘Technology’ at 15.9% followed by ‘Industrial Products & Services’ at 14.3% and ‘Consumer Products & Services’ at 10.2%.

The top 10 companies represent just over 40% of the index with the largest companies currently ASML Holding, Louis Vuitton (LVMH), SAP, Linde, Siemens, Sanofi, TOTAL SA, Allianz, L’Oreal and Schneider Electric. The EURO STOXX 50 is weighted according to free-float market capitalisation and therefore it does not necessarily represent the largest companies across the eurozone.

In fact, the largest company in terms of overall market capitalisation is Louis Vuitton (LVMH) at over €300 billion followed by ASML Holding at €230 billion. It is important to note that in view of the manner in which the EURO STOXX 50 is compiled, there are several large companies that are not ranked within the top 10 of the EURO STOXX 50. In fact, the Dutch technology company Prosus has a market cap of around €140 billion (the 4th largest across the eurozone) but does not feature in the top 10 of the EURO STOXX 50. Similarly, Anheuser Busch Inbev and Volkswagen, both having market caps in excess of €120 billion, also do not feature among the top constituents of the EURO STOXX 50.

ASML Holding is a Dutch multinational company which manufactures equipment for the chip-making industry. Currently, it is the largest supplier of photolithography systems for the semiconductor industry. Over the past 5 years, the market cap of ASML exploded from under €40 billion to over €230 billion.

The other technology companies within the EURO STOXX 50 are SAP, Prosus, Infineon and Amadeus. Another company that has shown extraordinary growth in recent years is the Dutch electronic merchants and payments company Adyen. Although this could also be regarded as a technology company, it is classified under the ‘Industrials’ category within the EURO STOXX 50 together with engineering giants Siemens and Airbus.

In the luxury goods sector, two of the most well-known companies in the world are LVMH and Kering which is the owner of Gucci among many other brands. LVMH is the largest company across the eurozone and is active across six sectors, namely Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewellery, Selective Retailing and Other Activities. The Chairman and CEO of LVMH, Bernard Arnault representing the Arnault Family Group, owns around 47% of the company. Bernard Arnault is ranked as the richest person in Europe and the third richest person in the world according to Forbes. Over the past five years, the market cap of LVMH has grown from just over €70 billion to over €300 billion. Although the share price had dropped heavily at the start of COVID-19 in early 2020, it has since more than doubled from its low in March 2020.

The share price performance of Kering in recent months has been similar to that of LVMH. Kering’s market cap is however still below the €100 billion level. François Pinault is the founder of Kering and still holds a stake of 41%.

Another very well-known European multi-national is Industria de Diseño Textil SA better known as Inditex (the largest fashion group in the world with over 7,200 stores across 93 markets worldwide whose flagship brand is Zara). Inditex currently has a market cap of just over €100 billion but it does not feature among the top constituents of the EURO STOXX 50 due to the large shareholding stake of the Ortega family in the company. Founder Amancio Ortega still owns just under 60% of the company and is reported to have a net worth of circa €70 billion.

Since the launch of the EURO STOXX 50 in 1998, the compound annual growth rate of the index was 2.08%. The worst year on record was in 2008 (at the height of the global financial crisis caused by the collapse of the US subprime mortgage sector) when the index shed an extraordinary 44.4%. Meanwhile, the best performance for the EURO STOXX 50 was in 1999 with an appreciation of 46.7%. Interestingly, the record closing high of the EURO STOXX 50 was 5,464.43 points on 6 March 2000 at the height of the dot-com boom as global equity markets had continued to rally in the first part of 2000 following the sizeable gains during the previous twelve months and also in prior years.

The index reading of the EURO STOXX 50 is currently at just over 4,000 points. Since the start of 2021, the index gained 15.1% following the very strong performance by the French CAC 40 (at 18%) and the German DAX 30 at 14%. The EURO STOXX 50 is the best performing index so far in 2021 when compared to the main US indices (Dow Jones, S&P 500 and the Nasdaq) as well as the FTSE 100 index in the UK. In fact, the Dow Jones and the S&P 500 ‘only’ added around 13% whilst the FTSE 100 and the Nasdaq gained 10% and 8% respectively.

However, in 2020, the eurozone stockmarkets underperformed those in the US. While the EURO STOXX 50 dropped by 5.1%, the S&P500 in the US rallied by 16% and the Nasdaq soared by 43%.

The easiest way to invest in the EURO STOXX 50 is via Exchange Traded Funds. The two most popular EURO STOXX 50 ETF’s are the SPDR EURO STOXX 50 ETF and the iShares EUROSTOXX 50 ETF. Since both these ETF’s track the EURO STOXX 50, they are very similar and could represent a suitable option for investors aiming to diversify the equity component of their investment portfolios and gain exposure to some of the largest companies across the eurozone. This would especially be pertinent to those Maltese investors who over the years limited their exposures to equities and bonds listed on the Malta Stock Exchange. Although the Maltese economy is expected to recover strongly from the sharp setback caused by the pandemic (with the latest testament being the excellent credit rating recently reaffirmed by Fitch), the small size and concentration risks to key sectors of the Maltese economy make it sensible for higher net worth investors to diversify across international equity markets given the wider choice available and the higher degree of liquidity.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon.

RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

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