Four key trends and seven „Eurostars“ to rival the Magnificent Seven
The Magnificent Seven have long been the benchmark in the stock markets. But you have highlighted that there is also a basket of European stocks that do not need to be hidden behind them, having achieved a similarly impressive performance, with an annual return of 30% from early 2020 to mid-2023. Which companies do you consider to be the „Eurostars“, and why?
We sought companies that can compete with the Magnificent Seven. Our seven Euro stocks are Adyen, ASML, Ferrari, Hermès, LVMH, Novo Nordisk, and Schneider Electric. The Magnificent Seven have a strong market presence and large market capitalisations. More importantly, they have reached a point where they offer a unique service and have very strong dominance in their industry. We chose these seven „Eurostars“ because they also occupy a special position in their field, for example, as one of the market leaders in luxury fashion.
How did you approach your selection?
We looked at various sectors and then examined which companies had a unique offering. For instance, we found Novo Nordisk in the pharmaceutical sector, a major chip manufacturer like ASML, Louis Vuitton, Hermès, and Ferrari in the luxury sector, Adyen in digital payments, and Schneider Electric in electrification. We focused on European companies that comply with European regulations and hold a leading market position, which could lead to higher market shares, higher returns, and market dominance.
What other criteria did you consider when compiling your „Eurostars“?
We did not rely on strong quantitative metrics. We considered the entire spectrum, focusing on the European universe. However, these companies had to demonstrate market dominance or a unique selling proposition. Of course, this is somewhat subjective. There are some companies that could be on the list but aren't. For example, we like it that Ferrari has good returns and interesting prospects.
How did the selection process go for the Magnificent Seven?
It was quite similar. They were also first assembled as a group after they had performed well. So no one played around with this basket with the idea that it would perform well. It's a bit the other way around.
Unlike their American counterparts, the „Eurostars“ also offer lucrative dividends. Was that also a selection criterion?
European companies often pay higher dividends than US companies, which is somewhat inherent. The Magnificent Seven pay very low dividends. In contrast, the dividends of the „Eurostars“ are somewhat higher. We also looked at share buybacks, and it shows that US companies have a higher percentage of buybacks. When examining distributions in the US, you get more shares per dollar. In Europe, it’s the opposite: you receive a higher dividend with a lower buyback yield.
You also see lower volatility as another advantage of the European showcase companies compared to the Magnificent Seven. Can you explain why European stocks are more stable?
This is because our basket for Europe is somewhat more diversified than the Magnificent Seven in the US. The latter are heavily technology-driven. There are some companies that stand out with high volatility, such as Tesla, which is also part of the Magnificent Seven and contributes to their overall volatility. Our „Eurostars“ are more balanced across various sectors.
Greater diversification will certainly be beneficial when the AI hype in the US dies down. You have identified three additional trends beyond the wave of digitalization. What are they?
Yes, in the „Eurostars“ basket, we see three further trends: First is the increasing demand for healthcare services, especially for obesity medications, where Novo Nordisk is active. Second is the household and luxury sector, where LVMH operates. Particularly in Asia, a growing wealthy middle class has the opportunity to purchase luxury goods from LVMH and Hermès. The third trend is the energy transition, where Schneider Electric is very prominent. In the US, with the Magnificent Seven, it's only the technology sector, while among the „Eurostars“, we also see growth in healthcare services, household wealth, and the energy transition.
However, some of the European flagship companies have recently weakened. For instance, Novo Nordisk could not fully meet market expectations, and ASML is suffering from export restrictions. Are these the usual market setbacks or are the driving forces on the stock market changing?
It is true that the „Eurostars“ have faced some headwinds recently, while the Magnificent Seven continue to generate high returns. We have observed some weakness in Novo Nordisk over the last three months, as well as in Louis Vuitton. This is partly due to geopolitical issues and problems related to production and export. But we still consider the „Eurostars“ to be seven great companies, even though their results are somewhat less positive at the moment. This is also due to some weakness in China. European companies are generally more vulnerable as they are very export-oriented, while US mega-corporations are less dependent on exports.
What do you recommend to investors who want to invest in the „Eurostars“?
We created this basket of „Eurostars“ to show people that there is an alternative to the Magnificent Seven in the US. We want to highlight that the current focus or attention might be too heavily on the US. Our recommendation is: Don’t overlook the big European companies! They can also achieve very attractive returns. The US does not solely dominate the market. There are also some very interesting European corporations worth considering, such as the „Eurostars.“
Meet the person
Jordy Hermanns is a portfolio manager in the Multi Asset Group and an investment strategist at Aegon. He is responsible for tactical and strategic asset allocation strategies.
