Unlike the S&P 500, European Rally Has Many Stars: Taking Stock

(Bloomberg) -- With November bringing gains across the board, Europe’s equity benchmark is heading for its biggest annual gain since 2009, while U.S. stocks are at an all-time high. But within the equity rally, some regions are showing better market breadth. While the Stoxx Europe 600 Index may be lagging the S&P 500 Index amid poorer earnings and economic and political worries, its gains are more evenly distributed among members.

While the S&P 500 has soared 23% this year, the biggest contributors to the gains have been concentrated in names that are heavily skewed toward the tech sector. By contrast, the 20% rally in the Stoxx Europe 600 is spread across different sectors.

Let’s take a closer look: Apple alone was responsible for adding 9.4% to the S&P 500’s move in 2019, followed by Microsoft with 7.2%. In Europe, no single stock contributed more than 5.5% to the Stoxx 600. That came from food giant Nestle.

The sector diversity of European stock gains could mean a softer landing for investors in case of a sharp sell-off in the tech sector or growth stocks, where tech has a big weighting. Europe on the other hand has just a few big tech companies in its benchmark, with only ASML and SAP among the top ten contributors to gains. Others on the list include pharma stocks Roche, Novartis and AstraZeneca, and luxury giant LVMH.

“There are a handful of names in Europe where international investors will crowd in, but evidence of crowding in the U.S. seems much more pronounced,” said Luke Newman, a portfolio manager of U.K. equities at Janus Henderson Investors. “There’s less multiple-contraction risks in Europe simply because valuations are just lower.”

Europe faces plenty of hurdles -- Brexit is still far from being resolved and a U.K. general election may muddy waters, while economic growth remains tepid and earnings results are mixed.

Still, a big sell-off in tech could leave a smaller impact on the Stoxx 600 than the S&P 500.

“The tech exposure in Europe is very limited,” said Alberto Tocchio, chief investment officer at Colombo Wealth SA. “This could work well in Europe’s favor if the market will continue the current narrative of value outperforming thanks to some positive turnaround on macro data. The market fragmentation could start favoring Europe versus the U.S.”

--With assistance from Michael Msika.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh

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