Broad international diversification used to be relatively easy to generate from equity funds benchmarked to global indices. But big gains in technology stocks mean some indices now consist chiefly of US stocks instead of companies from other countries.

The MSCI World Index – a traditional barometer of 23 international markets – today has an approximate 70% weighting to US companies. This pushes its overall weighting to the Americas to 73%, compared to just 53% in 2000.

“Such has been the dominance of a limited number of US stocks that even global equity indices now include outsized allocations to the same US megacaps that dominate the major US indices,” Niall Gallagher, Investment Director at GAM Investments recently wrote. 

“Nvidia, for example, has 6.8% weighting in the S&P 500 Index and a still-hefty 4.3% weighting in the MSCI World Index,” he says.

By contrast, the index weighting to companies in the developed markets of Europe has slipped markedly since the early 2000s. This may dilute an investor’s exposure to European market heavyweights and the sectors prevalent in the region.

Europe explored

The make-up of Europe’s major indices highlights the differences between itself and the US market. 

Both the MSCI World Europe Index and STOXX Europe 600 Index, for example, feature the same top 10 companies. Danish healthcare company Novo Nordisk B (best known as manufacturer of Ozempic and Wegovy) ranks as the biggest company in each, followed by Dutch semiconductor vendor ASML Holdings.

Swiss company Nestle and German company SAP are among the next largest, along with another three healthcare stocks – British biopharmaceutical company Astrazeneca, Swiss biotech Roche and Swiss medicines company Novartis.

The top 10 stocks are rounded out by British energy company Shell, French luxury products maker LVMH Moet Hennessy and global bank HSBC.

The broader diversification of the European market is also reflected in the geographic and sector distribution of the US$10.8 trillion MSCI Europe Index, which tracks 415 companies across 15 developed market economies.

Financial companies account for 19.2% of the index, followed by industrials (17.02%), healthcare companies (16.07%), consumer staples (10.8%) and consumer discretionary (9.75%). 

By comparison, the MSCI World Index has a far greater concentration in information technology companies (24.7%). Its next biggest weightings are financials (15.43%), healthcare (11.71%), industrials (11.1%) and consumer discretionary stocks (10.25%).

Market return

Since inception in 1987, the MSCI Europe Index has returned much the same as the MSCI World Index, by gaining 8.11% compared to the latter’s 8.54% in periods to October 31. The discrepancy between the two has widened in recent years, likely as result of the big gains in US-domiciled technology stocks.

The STOXX Europe 600 differs in its overall construction to the MSCI Europe Index, covering 600 small to large capitalisation companies across 17 countries. Its top sector weightings are also different to the MSCI Europe Index – with healthcare its top weighting at 16%, followed by industrial goods and services (13.9%), banks (9.5%) and technology (7.8%).

This bigger universe of companies potentially explains why it returned 16.1% in the year to September 30 and 33% in the five years to the same date. 

Its constituents outside its top holdings include Swedish company Electrolux B, airline company easyJet, Italian automobile company Ferrari, food company Danone and British supermarket chain Tesco.

Market outlook

So what lies ahead for European shares after a period earlier in 2024 in which some pundits argued they were better value than US shares?

“Looking ahead, the backdrop of falling rates could prove to be a good base for European equity markets to build upon in 2025,” Lazard Asset Management analysts wrote in October 2024.

“In particular a falling cost of capital could provide support for certain cyclical parts of the market, such as chemicals and commodity producers, where we believe valuations have become overly discounted versus the long-term potential of these businesses,” they wrote.

Lazard argues that valuations for European stocks remain modest versus their history and their international peers, while companies are engaging in more shareholder-friendly behaviour, from spin-offs and share buybacks to healthy dividend payments. 

Niall Gallagher from GAM Investments holds a similar view, arguing that: “a combination of attractive valuations, a broad range of leading companies with strong global franchises, as well as a lower stock concentration risk at the index-level and improved diversification at the sector level, highlight the appeal of European stocks.” 

The US might be home to the biggest sharemarket in the world – but Europe also offers opportunities worth exploring by advisers when adding global stocks to clients’ portfolios.

Learn more about trading International Markets with the AUSIEX International Markets platform.