Who are the GRANOLAS and should you add them to your portfolio?

European stocks are capturing the spotlight lately, drawing the attention of investors worldwide. The Euro Stoxx index, representing stocks across the continent, is up almost 17% over the past six months*. While concerns about economic growth persist in some areas of Europe, stock valuations have remained reasonable, avoiding overheating. Amidst this discussion, a group of 11 mega-cap European stocks has emerged as leaders in the market rally, the so-called GRANOLAS. Let's delve deeper into what's driving this interest and why it matters for investors.

So, what exactly are the GRANOLAS?

Coined by Goldman Sachs in 2020, these companies (GlaxoSmithKline, Roche, ASML, Nestle, Novartis, Novo Nordisk, L'Oreal, LVMH, AstraZeneca, SAP, and Sanofi) are characterised by their solid earnings growth, defensive nature, and sustainable dividends. They include some of Europe's largest and most valuable firms, spanning sectors such as healthcare, technology, and consumer staples. In fact, over the past year, the GRANOLAS have accounted for a significant portion of the gains in European stock indices.

These global companies have positioned themselves at the forefront of promising structural themes such as the aging population, advancements in AI and robotics, and ESG (Environmental, Social, and Governance) initiatives. With their robust dividends, solid growth outlook, and extensive international presence, the GRANOLAS have captured investors' attention. Those looking to add these companies to their portfolio might consider the Fidelity European fund which holds eight of the 11 representing roughly 38% of the overall portfolio**.

While the GRANOLAS have their merits, some experts caution against over-reliance on these mega-cap stocks. Despite their strengths, concentrating too much on a handful of companies can leave investors vulnerable to market fluctuations and ultimately, led you to miss out on opportunities elsewhere in the market.

Diversification is key

Zehrid Osmani, manager of the FTF Martin Currie European Unconstrained fund, suggests that investors should look beyond the GRANOLAS and explore other sectors within the European market. For example, European tech companies, particularly those in the semiconductor sector, present compelling opportunities. Companies like BE Semiconductors are benefiting from trends such as onshoring, as countries seek to reduce their reliance on semiconductor production in Taiwan. By investing in these companies, investors can gain exposure to lucrative markets without necessarily holding the big-name tech giants.

Moreover, beyond the GRANOLAS, European stocks linked to discretionary spending have been performing well. This includes companies in the travel, retail, and luxury goods sectors. As Europe's economy continues to recover, consumer sentiment is improving, potentially driving increased spending on non-essential items.

James Hanford, manager of the Comgest Growth Europe ex UK fund, emphasises the importance of investing in brands with longevity and durability. Companies like Hermès and Ferrari, with their established reputations and strong demand even during economic downturns, exemplify the kind of investments that can deliver stable growth over the long term.

Another aspect to consider is the size of the companies you're investing in. While large-cap stocks, including the GRANOLAS, have led the recent rally in European markets, smaller companies shouldn't be overlooked. David Walton, manager of the IFSL Marlborough European Special Situations fund, notes that European small-cap stocks are increasingly attractive due to their bargain valuations and potential for takeover offers.

These smaller companies may offer hidden gems for investors seeking growth opportunities beyond the mainstream. Another fund tapping into this area of the market is the Jupiter European Smaller companies fund, launched in February 2020. Manager Mark Hislop looks to buy and hold high-quality companies experiencing secular growth for the long term.

In conclusion, the success of GRANOLAS showcases Europe's strength in the global market, yet, investors must navigate the risks associated with their popularity. By diversifying their portfolios and looking beyond the big names, investors can fully capitalise on the opportunities presented by the European market.

*Source: FE Analytics, total returns in sterling, 13 October 2023 to 15 April 2024

**Source: FE Analytics, full fund holdings, 29 February 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.