What are GRANOLAS and should you buy them?

When it comes to coining a group of investment ideas, the financial markets are no strangers to the use of an acronym or two. First we had the BRICs – Brazil, Russia, India, China – which in the 1990s were considered the four most important of the emerging markets. The technological revolution of the 2010s then brought us the FANGs, a group of US mega-corporations not dissimilar to the Magnificent Seven that dominated the US stock market in 2023. Most recently we have seen the advent of GRANOLAS, a group of eleven – yes, eleven – companies in Europe that also dominate their market sectors. Like the BRICs, GRANOLAS is a construct of Goldman Sachs. Taken together, GRANOLAS now accounts for around 21% of Europe’s STOXX 600 – approaching the Magnificent Seven’s current share of the S&P 500.

What is GRANOLAS?

GRANOLAS are household names in Europe and far beyond. Like the Magnificent Seven in America, Europe’s GRANOLAS have been at the forefront of a major stock market rally over the past year. This means strong structural themes combined with higher than average valuations. GRANOLAS comprises multinational companies in the healthcare, technology, consumer goods and consumer discretionary sectors that derive their revenues mainly from the US and the rest of the world. In terms of residency, they are also quite reasonably spread across Europe.

Source: Bloomberg

The table above suggests that most of the GRANOLAS are not excessively valued at present, despite the high quality of their earnings. The GRANOLA technology companies – ASML and SAP – along with the largest European company of all – Novo Nordisk – are ranked higher, broadly in line with America’s Magnificent Seven.
How the GRANOLAS got here The GRANOLAS have two interdependent characteristics in common. They are all among Europe’s largest companies and they have all performed well in recent years. Their success has been largely driven by consistently robust operational performance combined with strong demand for blue chip investments. Make no mistake, GRANOLAS are exceptional companies. Novo Nordisk has skyrocketed to become Europe’s most valuable company, as demand for its innovative weight-loss drug Wegovy has far outstripped supply. ASML – the main supplier of chip etching machines behind Nvidia – has also seen its sales and shares rocket. LVMH – known for its Louis Vuitton handbags and Tiffany jewelry – has also boomed this year amid growing sales in China. GRANOLAS will benefit further as index-tracking funds attract more investors and as passive algorithmic trading in the stock market often favors momentum. As more index-tracking funds are bought worldwide, GRANOLAS can expect to see further inflows. Acronyms applied to groups of investments have largely stood the test of time, but not without changes. BRIC was changed to BRICS at one point to include South Africa, and Russia has long since lost its label as a sustainable investment proposition. The FANGs – Facebook (now Meta Platforms) Apple, Netflix and Google (now Alphabet) – were expanded to FAANGs by the inclusion of Amazon. Then they were changed to FAANG+ companies by the inclusion of Microsoft, Nvidia and Tesla. The Magnificent Seven is equal to this latter group minus Netflix, which was considered to have fallen by the wayside somewhat after Covid. GRANOLAS has a good chance of remaining intact for an extended period of time, given that they are in a wide range of established market sectors, most of which have much less volatile track records than technology. GRANOLAS promises mostly stable returns going forward.

An attractive way to diversify away from the Magnificent Seven

Such has been the growth of the Magnificent Seven, investors in globally diversified funds can now have heavy weights in them. Global index tracking funds that are very popular with Fidelity’s personal investors certainly do. GRANOLAS are comparable to the Magnificent Seven in the sense that they have a proven ability to drive returns across a wide range of stock markets and benefit from long-term trends that tend to be independent of short-term economic ups and downs.

Investment prospects remain good

Europe has a unique mix of attractions, including the world’s largest consumer market; a high exposure to emerging markets through exports; a host of internationally recognized consumer products and luxury brands; and a world-leading position in greenhouse gas avoidance measures. The traditional draw compared to the US has been the banking sector. US banks delivered fairly consistently superior returns after a period of higher US interest rates between 2016 and 2019. They have continued to do so, largely because they benefit from higher levels of fee-generating corporate activity. Today, European stocks trade at an overall discount of around 35% to their US peers, based on the amounts companies are expected to earn over the next 12 months. Meanwhile, earnings themselves are currently forecast to return to growth this quarter on an annualized basis (+2.8%). Earnings growth is expected to accelerate thereafter – to 9.1% and then 18.5% in the last two quarters of the year3. In Europe’s case, premium returns do not necessarily come at a premium price.

Invest in Europe and GRANOLAS

Investing in a European fund can bring a great deal of additional diversification to your portfolio, through sectors not well represented in the UK and across a diverse group of nations. Fidelity’s Select 50 list includes three funds investing in Europe, each of which offers an exposure to at least some of the GRANOLAS. The passively managed Vanguard FTSE Developed Europe ex UK Fund, of course, provides exposure to all of them, except GSK and AstraZeneca. The Comgest Growth Europe ex UK Fund has ASML and Novo Nordisk as its top two holdings, together accounting for around 15% of the portfolio. LVMH is in eighth place. The Schroder European Recovery Fund is understandably structured rather differently with only one GRANOLA – Sanofi – in its top 10.

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