Dissecting the Magnificent 7 versus the Granolas; market concentration, and earnings

Published on 22 April 2024

Lindsay Scott, investment manager at Walter Scott & Partners

Lindsay Scott, investment manager at Walter Scott & Partners, discusses the top market drivers informing her investment decisions and stock-picking strategy.

Scott unpacks the growing attention on the Granolas, Europe’s rival to the US’s Magnificent 7 (aka Mag 7), and the reasons behind the momentum.

She also looks at the concerns surrounding stock market concentration where investors risk too much exposure to these mega-cap firms and warns that their dominance “can’t last forever”.

In this episode, Scott also discusses her expectations for Q1 earnings, what she’ll be paying attention to, and where to look out for weaknesses and potential surprises to the upside.

We have an extended version of the show only available to our email subscribers. In the full show, Scott breaks down Walter Scott & Partners’s stock-picking strategy and how they build their equities portfolios.

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North America: Weekly Review and Outlook on Markets

  • Last week, US equities climbed following two-week lows yet saw one of the worst weeks for bid-ask spreads.
  • Last week, US investment-grade volumes ticked up but bid-ask spreads are tight compared to the year-to-date average.
  • This week’s data: Markets can expect the US’s GDP Growth out on April 25, US Core PCE figures on April 26, and the latest batch of Q1 earnings e.g. Tesla
  • This week in primary equities: 7 IPOs expected to price at 1.3 billion dollars e.g. Rubrik

Europe: Weekly Review and Outlook on Markets

  • Last week, EU volumes and notional values dropped off but bid-ask spreads saw little difference week on week.
  • Last week, Euro investment grade saw one of the slowest weeks since early January but bid-ask spreads saw little change.
  • This week’s data: Government budget to GDP report is out on April 22 and earnings e.g. Visa, Novartis, and AstraZeneca.
  • This week in primary equities: 2 IPOs expected to price this week e.g. Public Property Invest at 198.2 million dollars.

Interview Transcript

Jo Gallagher Lindsay we’ve had an interesting few weeks in the markets. Set the scene for us, what are some of the market drivers that are going into your investment decisions, and what do you think could create volatility?

Lindsay Scott So here at Walter Scott we are very much stock pickers. We’re long-term investors we’re very very patient. But we are seeing a lot of volatility in the market at the moment for a variety of reasons.

Clearly, there’s some very concerning geopolitics. We’re also in the midst of earnings season. This week is a really really big week. Markets are a bit skittish and expectations are pretty high I think. So any misses or weak outlooks that may drive some share prices down for us as long-term holders may give us an opportunity to get into a company that we maybe have been looking at for quite some time.

We’ve already seen last week some really positive earnings from the likes of L’Oreal or Essilor. LVMH and Adidas also had some really strong results last week, showing the consumer still relatively buoyant, so that’s encouraging. But the biggest risk is the geopolitics I think.

Speaker 1 There’s a substantial amount of attention around US exceptionalism and the Mag 7. But some of that attention might be redirected to the European rival, the Granolas. Tell me, who are the Granolas and why should we be paying attention to them?

Lindsay Scott The term Granolas has actually been around for a while. I think it first came into use in 2020, at the beginning of the pandemic. It’s actually an acronym for 11 European companies that are consistent growers that have typically got strong balance sheets. They’re leaders in their field the likes of LVMH, Novo Nordisk, GSK, Roche, SAP, ASML, the sorts of businesses that we at Walter Scott really, really admire and the types of companies that we like to invest in.

They are very different sectorally to the  Magnificent Seven, mostly pharmaceutical businesses, a little bit of tech and some consumer. They’ve been around for a long time. They’ve been through many, many cycles. These are very, very strong businesses. If you think of, you know, LVMH for example, it’s the leading luxury goods company in the world with the strongest brands, really, really strong growth fundamentally, but also in share price terms, you know, through a variety of cycles over the last ten, 15 years. Or if you think of Novo Nordisk, which is clearly having a phenomenal run at the moment and very clear visibility into the future for the opportunity in the diabetes and obesity space.

You know, these companies have good track records, but also a good horizon in front of them with some longevity to their earnings stream.

Jo Gallagher Keeping with the Granolas versus Mag 7. There’s also a lot of talk about overconcentration. How concerned are you about that? And how should trading desks and investors be thinking about that?

Lindsay Scott In the U.S., these seven businesses have clearly generated a huge amount of returns over the last couple of years or related to AI in some shape or form. So typically it always gets some initial excitement.

In the short term, it tends to be overestimated in the short term. But then the reality is in the long term this excitement is underestimated. So if we look back, I mean, 20-plus years ago, it was the tech bubble, the TMT bubble, you know, it was too much too soon. And we saw this huge pop in share prices and then all died away. And it died very quickly, very fast. A lot of loss-making companies, a lot of start ups at that time.

Some of it is justified in these businesses. If you look at an Nvidia, for example, you know, a really, really strong earnings stream, really, really good visibility but we need to see AI being monetized more and being used more widely than it is today.

Don’t get me wrong, it is being used by many companies in things like job discovery or in aeronautical design, but it’s still not widely used. So I think we’ll see continued growth here. But this can’t last forever. These companies can’t continue to dominate forever.

Jo Gallagher Q1 earnings have also kicked off. What should we be paying attention to in this earnings cycle?

Lindsay Scott Last week we had LVMH report. They reported 3% earnings growth in their Q1. We also had TSMC, which although the results were good, the outlook was poor. That had a dampening effect on the semiconductor space. So seeing how that plays out in more companies in the next week. So again, looking at Hermés, for example, how they are going to perform Hermés is an exceptional luxury goods play. But LVMH has kind of set the bar at it was 2% in their fashion leather goods. I think our Hermés will probably be in the double digits.

There is weakness in China, clearly, but then we’ve been seeing some very positive travel numbers. The Chinese consumers are traveling predominantly to Japan at the moment. It seems we’re getting very good numbers out of Japan. So these are sort of areas that will be focused on in the companies coming through.

I think this week we have Microsoft reporting, which obviously is critical. We’ve got Novartis reporting. Some of Novartis is key drugs like Cosentyx, like Kisqali, which is their big breast cancer drug, Kestimpta in multiple sclerosis. We’re really expecting to see some really strong results.

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(Magnificent 7, the Granolas, stock market concentration and earnings)