The Euro Stoxx 50 index has recently once again surpassed the level of 4,400 points – the highest level since the start of the global financial crisis in mid-2007. The Euro Stoxx 50 index is a widely-gauged benchmark tracking the performance of large European companies operating across the eurozone. It is composed of 50 companies from nine countries across the eurozone.
The 14 per cent gain in the index since the start of 2023 (the second-best start to the year since 1999) to its highest level in 16 years may be very surprising to the investing public given the tough macro environment with ongoing fears of an imminent recession, the spike in interest rates globally as inflation surged, together with the latest banking crisis.
One of the main factors that positively influenced the performance of the Euro Stoxx 50 index over recent months was the re-opening of China’s economy following the severe COVID-19 restrictions since early 2020. European companies have a higher exposure to China compared to US companies and should benefit more from the strong rebound in Chinese demand for luxury goods.
Amid hopes of a rebound in Chinese consumer spending, the share prices of a number of companies within the luxury sector rallied strongly with LVMH in the forefront. Earlier this week, LVMH became the first European company to surpass USD500 billion (€456 billion) in market value. The share price of LVMH rallied by 30 per cent since the start of the year after the company reported a 17 per cent rise in first-quarter sales earlier this month, more than double analyst expectations.
The Euro Stoxx 50 index is weighted according to free-float market capitalisation and therefore it does not necessarily represent the largest companies across the eurozone.
In fact, although the sharp upturn in LVMH’s market value helped it enhance its status as the largest European company, it is not the largest component within the Euro Stoxx 50 index. LVMH currently has a weighting of just seven per cent despite its market cap of over €450 billion while ASML Holding, the Dutch multinational company which manufactures equipment for the semi-conductor industry, has the largest weighting at 8.2 per cent and a market cap of €230 billion.
The top 10 constituents within the index (accounting for just over 42 per cent of the overall index) are ASML Holding, LVMH, Totalenergies, SAP, Sanofi, Siemens, L’Oreal, Schneider Electric, Allianz and Air Liquide.
Due to the manner in which the index is weighted, LVMH’s smaller rivals Hermes International and Kering do not feature within the top 10 companies. Hermes also published strong financials for the first quarter of the year reinforcing the view that China’s reopening from pandemic-related lockdowns is fuelling growth across the industry. Its share price rallied by 38 per cent since the start of the year pushing its market cap to €210 billion.
Kering, which owns various brands including Gucci and Yves Saint Laurent, also experienced a strong share price performance since the start of 2023 with an uplift of more than 21 per cent. At €73 billion, however, the company has a much smaller market cap than its rivals LVMH and Hermes.
Only two of the companies within the Euro Stoxx 50 index, namely Totalenergies and Vonovia, saw their share prices weaken since the start of the year. Meanwhile, the best performers are Flutter Entertainment and Philips with gains of just over 40 per cent closely surpassing the gains in Hermes International and LVMH. The large majority of the 50 companies forming the Euro Stoxx 50 index recorded double-digit gains since the start of the year helping the index to outperform the S&P 500 index in the US which is currently showing a gain of eight per cent in 2023.
Apart from the positive impact from China’s re-opening, the European market benefited from relatively cheaper valuation multiples and investors diversifying away from the US into Europe as the eurozone avoided the energy crisis and is unlikely to enter a recession. In fact, the euro recently jumped to its highest level in more than a year versus the US Dollar as the market expects the ECB to continue to hike rates while a worsening US economy should prompt the Federal Reserve to halt rate hikes or reduce interest rates this year.
While the Euro Stoxx 50 index has sharply outperformed with a gain of 35% from its low in September 2022 of just over 3,200 points, over a longer time period however European equities have been defined as “structural underperformers” as they dwarfed the sharp rallies of the US indices since the end of the global financial crisis in 2008. The Big Tech companies in the US are largely responsible for the spectacular outperformance since 2008.
The strong rebound in the Euro Stoxx 50 index from the low in September 2022 is another stark reminder that stockmarkets historically have always rewarded patient investors over the long-term as they generally tend to recover over time. Although many retail investors may try to time the market, the more-seasoned investors widely argue that ‘time in the market’ is of essence rather than ‘timing the market’. Historical performances clearly show that those who stay invested over the long run will generally do better than those who try to profit by seeking to time the highs and lows in the market.
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