Finding a positive story in Europe’s flatlining economy has been tough recently.
Between red-flashing recession signals, falling production, and a flight of money from its biggest companies to the U.S., the continent is in a pretty bad state, especially when compared with its allies across the Atlantic.
But there’s one surprising area where Europe has been holding its own against the roaring U.S.—the stock market. And the continent has something called “Granolas” to thank.
Granolas give Europe some crunch
Banking giant Goldman Sachs has earmarked a collection of European stocks as among the most exciting for investors after they kept up with the growth of S&P 500 leaders in the U.S.
The Granolas was first coined by Goldman in 2020 after it bundled together GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi as exciting growth prospects.
Nearly four years later, it’s clear the bank was on to something.
Flying in the face of Europe’s reputation as an industrial laggard to the U.S.—the top Fortune 500 Europe companies come from old-school sectors like energy and automotive—the Granolas are spearheading innovative sectors like pharmaceuticals and tech to deliver massive shareholder returns.
Highly regarded retail stocks also lead the charge.
The Granolas have matched the growth of the Magnificent 7 since 2021, and the group accounted for 60% of all gains in the Europe-wide STOXX 600 index last year.
Goldman points out that the Granolas are a big reason for gains in the European stock market in spite of the continent’s flatlining economy, and might even have its anemic growth to thank for their own mammoth returns.
Several of Europe’s biggest economies are flirting with recession, or are already in one.
The continent’s biggest economy, Germany, declined by 0.3% last year and the country has slashed its growth outlook for 2024. Its PMI readings indicate falling production levels for 22 straight months.
The region as a whole continues to battle the effects of sanctions on Russia following the country’s invasion of Ukraine, which pushed up energy and transport costs.
Frostier relations with other trading partners like China, alongside supply chain hangovers from COVID-19, have also helped ramp up costs and dampen consumer confidence.
But the Granolas, according to Goldman, are built for Europe’s long economic winter.
Indeed, the bank says the group of stocks enjoy their best performance when annual GDP growth is below 3%.
They have proven popular despite Europe’s precarious economy because of their industrial makeup and the rising popularity of passive investment funds, according to Swarup Gupta, industry manager and lead analyst in financial services at the Economist Intelligence Unit (EIU).
“They provide a healthier, balanced portfolio in times of great economic and political uncertainty and, given the popularity of low-cost investment vehicles like ETFs and algorithmic mutual funds, are likely to retain their popularity in the year ahead at the very least,” Gupta told Fortune.
Magnificent 7 without the bubble baggage?
Commentators are wont to find the newest listing of hot stock groups that can give investors a shortcut to secure, index-based gains.
Before the Magnificent 7, it was the MAANAM stocks, which usurped the long-popular FAANG group, thanks mainly to a name change by Meta and Netflix’s fall-off.
It’s easy to draw comparisons between the success of the Granolas and the U.S.’s latest group of stock market giants: the Magnificent 7.
The tech group comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla made up most of the S&P 500’s mammoth 24% returns last year.
But based on soundings coming from Wall Street’s biggest names, many investors think the run could soon be over.
Jeremy Siegel, the luminary who predicted the dotcom bubble, argued another one may be forming over AI, but that it was impossible to know when it might end.
Other commentators like Shark Tank’s Mark Cuban and JPMorgan CEO Jamie Dimon are more skeptical that the Magnificent 7 is leading the US stocks off a cliff edge.
Whether there is an AI bubble or not, the Granolas appear to be less exposed to it, with tech companies making up only a fraction of the group.
The pharmaceutical stocks in the group have long been popular in the U.S. and their pioneering research in cancer and obesity medication means they’re likely to stay that way, according to Ana Nicholls, industry director at the EIU.
“Europe remains focused on the higher-value end of the pharmaceutical supply chain, where skills, innovation and a conducive business environment are more important,” Nicholls said.
Meanwhile, luxury retail stocks like LVMH and L’Oreal have managed to defy a wider industry downturn to outperform their rivals.
Goldman strategists summarized: “In our view, the reason why this group of stocks trades at a premium to the market is that they offer strong (and predictable) growth.”
Morgan Stanley, which recently kickstarted its European equities focus, says it is also bullish on European stocks in a seal of approval from some of the world’s biggest banks.
Risks abound
One place where the Granolas are aligned with the wider European economy is its exposure to risks—and there are many.
The impending U.S. election could spell disaster for Europe’s biggest businesses if Donald Trump reclaims the White House and enacts a proposed 10% tariff on all imports. The Granolas’ production presence in the U.S., though, softens that risk.
There is also the nagging threat of China. Goldman estimates 10% of the Granolas’ revenues come from China, a country that has been battling falling consumer sentiment in the years since a stuttered exit from COVID-19 lockdowns.
L’Oreal has struggled with a slower-than-expected return to spending from Chinese residents, a trend that has hit the wider beauty sector.
Like in the U.S., China also carries the looming potential for enhanced trade barriers if political tensions turn even more frosty.
The index itself has its skeptics too, with an ominous warning that investors should look at more than the name before backing highly touted stock groups.
“Catchy names do not necessarily make for good investments over the long term even if the hype can push share prices along the near term,” says Russ Mould, investments director at stockbroker AJ Bell.
“The firms in question have little or nothing in common, barring their geographic origin in Europe, and the acronym is just a marketing tool, no more.”
For now, though, the aptly named Granolas might offer a healthier alternative to their jacked-up American cousins, giving Europe’s economy a bit of much-needed crunch.
