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Europe’s Ongoing Evolution
Relative to the US, Europe’s stock markets have a reputation of being staid, dominated by “old economy” industries and national champions. But Europe may no longer deserve this reputation. Since the global financial crisis (GFC), the makeup of Europe’s equity market has undergone a gradual but meaningful evolution.
As constructed at the start of 2007, the European equity market certainly lived up to its reputation. The financials sector alone accounted for 30% of the MSCI Europe Index as of 31 Dec 2006, while the energy and industrials sectors were nearly 10% each. Banks accounted for roughly 17% of the index, while capital goods was nearly 7%.
Exhibit 1: MSCI Europe Index–Sector Weights (%)
That’s not the case anymore. Following the GFC, sovereign debt crises and Brexit, banks now account for little more than 6% of index. And the volatility in oil prices has contributed to the energy sector’s shrinking to 4%.
Perhaps more noteworthy are the sectors that have grown during the past 14 years. Health care is now the largest sector, with a weighting of nearly 16%, led by growth in the pharmaceuticals industry. Information technology’s weighting has nearly doubled, from 4% in 2006 to nearly 8% today. In fact, the software industry is larger than the automobiles industry, which includes global powerhouses Volkswagen, Daimler and BMW.
Despite all region’s economic and financial market challenges since 2006, the increased index weights in more dynamic sectors and industries highlight the near-constant evolution of economies and financial markets. How quickly adaptation occurs and when investors recognize such change is another matter.
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