STOXX® Europe 600 sees growing investor interest

We spoke with Jan-Carl Plagge, Director – Head of Applied Research, STOXX Ltd., about the STOXX® Europe 600 Index and what makes it a unique barometer for an European market sentiment.

Can you give background on the index composition and the factors driving investor interest in the STOXX® Europe 600?

Jan-Carl Plagge: The STOXX® Europe 600 is a developed market index which includes shares of the 600 largest and most liquid companies in developed Europe. Hereby, the index covers approximately 90% of the investable market capitalization of the underlying equity market. It offers a good tradeoff between market coverage and tradability. In order to address liquidity, we introduced a minimum threshold of 1mn EUR ADTV for shares to be included into the index.

In terms of risk and return, the STOXX® Europe 600 behaves in a similar way as the underlying total market index STOXX Europe Total Market. However, due to the focus on the largest 600 stocks and the introduction of a minimum liquidity threshold, it offers these characteristics with a substantially higher turnover in the underlying shares. With a median ADTV of 24.8mn USD, turnover is more than 180% higher than the median turnover of shares selected into the STOXX Europe TMI, with a median ADTV of just 8.7mn USD.
This tradable, yet comprehensive representation of the underlying market is a key component of the attractiveness of the index. The attractiveness is enhanced by the traded contacts in options and futures: we find that the STOXX® Europe 600 is by far the most liquid broad developed European benchmark with more than 6.5mn traded futures contracts and 0.15mn traded options in 2015.

Can you elaborate how European countries and industries display diverse risk and return characteristics over the last decade?

Jan-Carl Plagge: An important characteristic of the index is its diversity not only across industries but also across countries.
The STOXX Europe 600 is broadly diversified across 18 developed European nations with the UK being the largest market (representing about 32% of the overall index market cap), followed by France (15%), Switzerland (14%) and Germany (13%). Its country allocation is very similar to that of the entire developed European equity market. In terms of performance, the UK also contributes the most to overall index performance.
Among industries, financials displayed the highest contribution to the overall performance. While this segment contributed substantially to the index’s positive returns in the pre- and post-financial crises period, it also drove drawdowns in 2008 and during the European debt crisis in 2010 and 2011.

The performance contribution of the remaining industries has been less pronounced and was mainly homogenous in direction.

How do STOXX® Europe 600 valuations compare to other major markets?

Jan-Carl Plagge: Europe offers quite attractive valuation characteristics when compared to other major equity markets. Scaling price by book value reveals that companies selected into the STOXX® Europe 600 are undervalued in relative terms. With a price to book (PB) ratio of just 1.77, it is 35% cheaper than the US equity market (PB ratio of 2.77) and still about 16% cheaper than the global equity market’s weighted PB of 2.11. However, it needs to be noted that these valuation differences have been very constant over time, giving them the character of a fixed effect. The European equity market is currently slightly cheaper than its long term average: with a PB ratio of 1.65 (Jun. 30, 2016), it is about 5% below its ten year average of 1.75.

Regarding Price to Expected Earnings, companies selected into the STOXX® Europe 600 are cheaper vis-à-vis the US and the Global Developed Equity Markets. However, considering actual rather than expected earnings, STOXX® Europe 600 components were more expensive than those selected into the S&P500 or the MSCI World during the European debt crisis and in the recovery period since 2013.

Lastly, the markets are still mulling over the repercussions of the recent U.K. referendum. How has Brexit impacted the STOXX® Europe 600?

Jan-Carl Plagge: The U.K. referendum definitely had a negative impact on the performance of the STOXX® Europe 600, as it had on other major benchmarks around the world. However, our analyses of the Brexit event on stock price performance indicate that the immediate negative impact was most pronounced for companies with the highest revenue exposure from the U.K. .
Analysing the revenue data of STOXX® Europe 600 constituents in particular, we find that, on a market-cap weighted basis, the exposure to the U.K. is lower than expected. In fact, STOXX® Europe 600 constituents generate only about 50% of their revenues within developed European countries. Quite surprisingly, with as much as 19%, companies selected into the STOXX® Europe 600 are more exposed to the U.S. than to any other European country. This international exposure certainly helped to mitigate the negative effect on performance stemming from the Brexit event.

_{1) Developed Europe currently entails the following countries: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.}

_{2) All figures are based on 1-year averages.}