Beyond the Name Game: Focus on Fundamentals
Key findings
- Strong gains in global equities at the start of 2024, led by the Japanese and U.S. markets, have highlighted the significant role a handful of high-performing stocks can have on overall returns.
- Fundamental analysis of the top regional stocks showed key differences: typical stars in the U.S. were high growth with digital models, in Europe high-quality health-care firms and in Japan export-focused value stocks.
- European and Japanese stocks benefited from robust international sales, especially in the U.S. market, as consumer demands shifted during the COVID-19 pandemic.
In the first two months of 2024, global stock markets were up 5%, extending a winning streak that began in late 2022. The Japanese and U.S. markets, both up 7%, were ahead of all major markets this year. European equities gained just under 4%. Technology stocks, including the well-known Magnificent Seven, are still leading the way in the U.S. In Europe and Japan, other acronyms such as "Granolas" and "Seven Samurais" have also emerged to describe standout stocks.
As we demonstrated previously, looking beyond labels and focusing on the characteristics that influence risk and return can be useful. In this blog post, we compare key fundamental attributes of the select group of stocks that has been driving returns across global equity markets.
Searching for international stars
We looked at the 10 "star" stocks in each of the MSCI Europe, MSCI Japan and MSCI USA Indexes that contributed most to their home market's return since 2020. Familiar examples of these include Nvidia Corp. in the U.S., Novo Nordisk A/S in Europe and Toyota Motor Corp. in Japan. We elected to study the period associated with the COVID-19 pandemic because it was characterized by several shifts in investor sentiment as the impact of lockdowns and interest-rate hikes unfolded.
Ten stocks accounted for majority of returns since 2020
Data is from Dec. 31, 2019, to Feb. 29, 2024. The return contribution is the 10 stocks' share of cumulative gross index return in EUR, JPY and USD for the MSCI Europe, MSCI Japan and MSCI USA Indexes, respectively.
Despite market swings over the period, 10 stocks accounted for about 40% of each regional market's overall return. While today's high levels of market concentration may pose a challenge to diversification, concentration in returns has been more the historical rule than the exception. A small fraction of stocks has historically accounted for the bulk of wealth creation in listed equities.[1] In fact, we found that over the last three decades, the top 10 contributors in each region accounted for over a quarter of the market's return.
Exposures highlight firms' operations, fundamentals and sentiment
Thematic exposures can help reveal the structural trends and business models that affect companies — and portfolios. The U.S. star stocks had greater exposure to tech-oriented trends, particularly those related to disruptive technologies and AI-adjacent businesses such as data centers. The top-performing European companies tilted toward health care, while leading Japanese companies leaned toward robotics and industrial themes, aligning with their manufacturing prowess.
European and Japanese companies tilted toward health-care and robotics themes
As of Feb. 29, 2024. The European, Japanese and U.S. stars are the top 10 stocks in the MSCI Europe, MSCI Japan and MSCI USA Indexes, respectively. Exposures use the MSCI Thematic Exposure Standard. Values are capitalization weighted and reflect economic linkage to a theme.
This "digital divide," and its association with favorable network effects, customer retention and platform power that many of the U.S. stars enjoy, has been a key driver for the high-growth, high-margin business characteristics that distinguish the group on its fundamentals.[2]
Stars aligned along the growth and value divide
Data is from January 2020 through February 2024. The European, Japanese and U.S. stars are the top 10 stocks in the MSCI Europe, MSCI Japan and MSCI USA Indexes, respectively. Exposures are monthly average z-scores for the 10 stocks in each region, calculated using the MSCI Next Generation USA, MSCI Next Generation Europe and MSCI Next Generation Japan equity models. Values are relative to each home market. We show only selected factors. "Exporter" refers to the "ex-Europe economic exposure" and "foreign sensitivity" factors in the Europe and Japan models, respectively.
Profit margins are just one way to differentiate each region's stock performance. The U.S. and European stars tended to be more growth-oriented and pricier stocks, while the Japanese stars showed many characteristics of value stocks: less expensive, lower profit margins, subdued earnings outlooks and higher debt compared to the broader Japanese market.
The digital divide reflects a broader trend in which growth stocks have propelled the U.S. market since the COVID-19 pandemic and the European market since the start of this year. Meanwhile, Japan's emphasis on shareholder-friendly reforms has elevated value stocks, resulting in expanded valuations and more-generous buybacks and dividends.
Evolution within star stocks
Exposures also highlight recent changes in business fundamentals. For instance, four of the U.S.'s Magnificent Seven stocks have surged so far this quarter, whereas the performance of the other three has fallen behind the broader market, as their price momentum shows in the following exhibit.
Fundamentals highlight growing split among US star stocks
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Data as of Feb. 29, 2024. Exposures are shown as z-scores relative to each home market. We show only one share class of Alphabet Inc. in the U.S. Sentiment is based on analysts' revisions and implied-volatility skew in options. A higher value (green shade) indicates bullish sentiment. A lower value (red shade) in short interest indicates a stock with fewer shorts.
Nvidia, Meta Platforms Inc. and Amazon.com Inc. have posted strong growth and widening margins, with investor optimism reflected in market indicators such as sentiment and short interest. In contrast, Apple Inc.'s China-related demand slowdown in mobile and Tesla Inc.'s deteriorating unit economics on electric vehicles have been reflected in their exposures.
International sales buoyed Japanese and European firms during the COVID-19 pandemic
Lastly, we looked deeper into the exporter category from the regional analysis. The prevalence of foreign sales has been a key attribute of the European and Japanese stars, such as ASML Holding NV and Toyota.[3] This distinction is important because exporters have earned higher returns in Europe and Japan since the onset of the COVID-19 pandemic.
Japanese exporters outperformed as COVID-19 lockdowns unfolded
Data is from January 2006 through February 2024, which is the longest joint history for the factors. The exhibit shows the returns to the "ex-Europe economic exposure" and "foreign sensitivity" factors in the MSCI Next Generation Europe and MSCI Next Generation Japan equity models, respectively.
Name recognition can be fleeting, but fundamentals have staying power
As we have shown, shifting consumption and supply patterns could benefit particular regions and countries. Japanese firms notably grew their sales in the U.S. market since 2020, likely benefiting from a weakening yen and a relatively more-aggressive post-pandemic reopening in the U.S.[4]
Labels and stock groupings may be transient, but the enduring value of thematic and fundamental analysis lies in the ability to uncover the macroeconomic and business dynamics that influence stock returns.
1 Hendrik Bessembinder, “Do stocks outperform Treasury bills?” Journal of Financial Economics 129, no. 3 (May 2018).2 These advantages have recently caught regulatory scrutiny from the U.S. “Justice Department Sues Apple for Monopolizing Smartphone Markets,” U.S. Department of Justice, Press release, March 21, 2024.3 We use ex-European or ex-Japanese sales (or assets) to quantify exposure to the exporter factor.4 MSCI Economic Exposure data shows that the U.S. revenues of Japanese and European large-cap stocks have grown since the onset of the COVID-19 pandemic.
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