National COVID Health Policy and Stock Returns

By admin_45 in Blog

We’ve been spending a lot of time in the “Disruption” section of our reports looking at how different European countries have been managing their economic restarts; today in “Data” we will examine the correlation between how a given country handled the COVID Crisis/its aftermath and its equity investment returns this year.

First, here are the dollar-based returns for each major country using exchange traded funds that track the MSCI index for each over the YTD (how badly has each been hit overall?) and from the March 23rd lows (how much has each been able to recover from peak market panic over the COVID Crisis?):

United Kingdom (EWU)

• YTD: -25.7%
• Rally from the March 23rd lows: +28.6%

Germany (EWG)

• YTD: -18.0%
• From 3/23: +29.4%

France (EWQ)

• YTD: -25.4%
• From 3/23: +19.2%

Spain (EWP)

• YTD: -28.8%
• From 3/23: +4.4%

Italy (EWI)

• YTD: -28.9%
• From 3/23: +11.6%

Two things pop out from this analysis:

• None of these countries are close to beating the S&P 500, which is only down 8.6% YTD and is up 32.0% from the March 23rd lows. If a country’s public health COVID response were a defining factor in equity returns, you’d expect to see German stocks do far better than American ones.
• The European country return data for March 23rd to present looks odd. Spain and Italy had a really rough time, but France did as well, and the UK actually had its national leader fall ill. And yet the UK equity market has bounced back much more than the other 3 countries’ stock indices.

The explanation behind these seeming anomalies relates to sector and individual stock weights:

#1: S&P 500 vs. German stocks. The S&P 500 has a 36% weighting to Tech + Amazon, Google and Facebook. Just over 11% of the index is Microsoft and Apple.

The MSCI Germany Index is 15% Technology, and that’s only because SAP is 11.2% of the index. Financials are 15% of the portfolio, which is not as bad as it sounds since Deutsche Bank and Commerz Bank only have a collective 1.6% weight in the index.

The rest of the top names in the Germany Index: Siemens (7.2%), Allianz (6.7%), Bayer (6.1%), and Deutsch Telekom (5.0%).

The takeaway: as good a company as SAP and these others may be, there’s not much else in the MSCI Germany Index that has the measure of US super cap Technology companies.

#2: Variations between UK, French, Spanish and Italian equity indices. Consider the top 3 sector and individual stock weights for each:

• United Kingdom
  
  Consumer Non-Cyclicals: 20%
  Financials: 17%
  Health Care: 15%
  
  Top 3 names (19% of total): AstraZeneca (7.8%), GlaxoSmithKline (5.8%), HSBC (5.7%)
• France
  
  Industrials: 20%
  Consumer Cyclicals: 17%
  Health Care: 14%
  
  Top 3 names (24% of total): Sanofi (8.9%), LVMH (8.3%), Total (6.7%)
• Spain
  
  Utilities: 28%
  Financials: 24%
  Industrials: 14%
  
  Top 3 names (36.4% of the total): Iberdrola (18.5%), Banco Santander (10.7%), ZARA (7.2%)
• Italy
  
  Financials: 28%
  Utilities: 24%
  Consumer Cyclicals: 14%
  
  Top 3 names (36.5%): Enel (19.9%), Eni (8.4%), Intesa (8.2%)

Takeaway #1: European country indices are more tied to their highest market cap companies than the S&P 500 is to Microsoft, Apple and Amazon. Those three stocks “only” make up 15.5% of the index, and it gets a lot of grief for that overweight. But in the case of the UK, France, Spain and Italy MSCI Indices, the single stock concentrations are even higher.

Takeaway #2: you wouldn’t know the Internet even existed from looking at either sector or single stock holdings within European country indices. Italy and Spain are half banks/utilities. France and Germany are manufacturing economies. Yes, there is world class Tech in Europe (SAP, ASML, Ericsson, etc.); there just isn’t enough of it.

The bottom line to all this: how a developed country’s equity market has performed and, more importantly, will perform simply has nothing to do with its health care policy response to COVID-19.