The Euro Stoxx 50 Index is the most referenced of all the hundreds of indices covering the eurozone equities market. But what does it tell us about the eurozone market and how does a company qualify for inclusion?
The Stoxx 50 depicts the share price performance of the 50 largest companies across what STOXX describes as 19 “supersectors” from within 11 eurozone countries.
As such, the index represents blue-chip leaders from among the equity markets of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
What is STOXX 50?
STOXX was formed in 1997 as a joint venture between Dow Jones, Deutsche Börse and SIX.
In 1998, STOXX launched its first indices, including the Euro Stoxx 50, or the Dow Jones Euro Stoxx 50 as it was then known.
Two years later, STOXX became the first index provider to implement the free-float market cap methodology for all its STOXX indices.
The method, which has since been adopted by most of the world´s major index providers, is viewed as the best way of calculating market cap as it seeks to exclude those shares that are not readily available to be actively traded in the market.
Over the years, STOXX steadily expanded the number of indices under its umbrella, while dropping the prefix Dow Jones from its index names in 2010 after Dow Jones itself left the joint venture.
In 2015, Deutsche Börse became the sole shareholder in STOXX as it acquired the shares owned by SIX.
A diverse family
While the Euro STOXX 50 is the best-known, there are thousands of indices bearing the STOXX name, reflecting the performance of different geographical regions, asset classes, market sectors and investment styles.
Certain STOXX´s indices, like the Euro STOXX 50, tend to include a limited number of blue chip stocks while others are much broader, containing hundreds of stocks across the market-cap spectrum.
Among the early indices launched by STOXX was the STOXX Europe 50, similar in many respects to the Euro Stoxx 50, but also including companies listed in non-eurozone countries such as Switzerland and the UK.
There is also the STOXX Europe 600 index, which represents the performance of 600 large, mid and small cap companies across the European region, again including firms listed in the UK and Switzerland as well as the eurozone.
Top STOXX: Euro STOXX or Euro STOXX 50?
The EURO STOXX index is a subset of the STOXX Europe 600, and is currently comprised of 296 small, mid and large-cap stocks from the same 11 Eurozone countries as represented in the Euro STOXX 50.
In 2011, STOXX expanded its index range outside the European region, adding a global index family along with regional indices covering the Americas, Asia and emerging markets. Among its global offerings is the STOXX Global 1800 index, which comprises 600 firms listed in each of Europe, America and Asia Pacific regions.
STOXX draws candidates for its flagship Euro STOXX 50 from across its 19 supersector indices. Well-known STOXX supersector indices include the Euro STOXX Banks index and the Euro STOXX Chemicals index.
The concentrated nature of the Euro STOXX 50, as it is made up of just 50 companies, means it can move more sharply than other broader indices, which contain a larger number of names. This can apply to both the upside and the downside.
For instance, during the dotcom bubble, the Euro STOXX 50 enjoyed spectacular growth, though it remains well below the peak reached in 2000 to this day. The index rose from 2,762 in February 1998, the month when it was incepted, to reach a peak of 5,317 in March 2000, a 92% return.
The bear market that followed the dotcom bubble saw the Euro STOXX 50 slide to well below the index´s inception value. By February 2003, the Euro STOXX 50 had fallen to just 2,171.
Prior to the financial crisis, the index had reached a peak of 4,470 by June 2007, though this was still around 16% below the peak attained seven years earlier. In the midst of the financial crisis and global recession, in March 2009, the Euro STOXX 50 had plunged to 1,994, below the trough of 2003.
European stock market
With the eurozone economic recovery having lagged that of the US, and the European Central Bank well behind the US Federal Reserve in its interest rate cycle, the performance of the Euro STOXX 50 has trailed comparable US indices over recent years.
Europe has also had to contend with a sovereign debt crisis across its periphery, with countries such as Greece having teetered on the brink of default.
Today, the Euro STOXX 50 is in fact still substantially behind the peak reached in 2007, and even further behind that reached in 2000, currently trading around 3,489.
The Euro STOXX 50 can be heavily influenced by investors´ assessment of the eurozone´s political and economic environment.
For instance, heading into the first round of the recent French presidential election, the Euro STOXX 50 Volatility index leapt as investors factored in the possibility that far-right candidate Marine Le Pen could become president. Index volatility more than doubled, from a low of 11 in March to a peak of 26 in April.
The volatility index has come off its highs, and currently hovers around 15, with the victory of centrist Emmanuel Macron in the French election viewed as having reduced political risk across the eurozone.
At the same time, the recent strong run of eurozone economic data has also put downward pressure on the volatility gauge. In general, volatility tends to rise when investors fear a recession is imminent. At the onset of the financial crisis in 2008, the Euro STOXX 50 Volatility index reached a peak of 71.
Today, the index´s relatively low level of 15 implies that investors currently see little prospect of a recession.
In terms of sector breakdown, banks are by far the biggest segment within the EURO STOXX 50, accounting for 15.2% of the index. Industrial goods & services are the next largest group (10.4%), followed by personal & household goods (9.2%) and chemicals (9.0%).
In terms of country weightings, stocks listed in France (36.1%) are the largest grouping within the index, closely followed by Germany (33.2%). The next biggest segments by country listing are a long way behind, with Spain and the Netherlands accounting for 10.7% and 9.8% respectively.
The largest constituent of the index is France-listed oil & gas giant Total. Accounting for 4.8% of the index, Total makes up most of the 6.8% weighting of the oil & gas sector just by itself. The next biggest member of the index is German industrial behemoth Siemens (4.5%), which is followed by healthcare name Sanofi (4.3%), the only other France-based company within the index´s top ten firms.
All the other companies within the top ten are German-listed, save for Spain-listed banking group Banco Santander (3.5%), Netherlands-listed consumer goods giant Unilever (3.3%) and Belgium-listed brewer Anheuser-Busch InBev (3.2%).
STOXX aims for the Euro STOXX 50 to represent the largest and most liquid stocks of the eurozone equities market.
STOXX holds an annual review, rebalancing the index each September to determine which companies should be promoted to the top 50 and which names should be relegated.
While the most important criteria for inclusion in the index is the free-float market cap, STOXX also claims to consider the balance between different sectors of the market.
STOXX uses the 19 EURO STOXX Supersector indices as the selection universe, ranking the member firms of these indices according to their free-float market cap.
The largest 40 stocks from this selection automatically earn a place in the Euro STOXX 50, with those ranked 41 to 60 eligible to be selected for one of the last remaining 10 places in the index.
Once updated, the index will remain unchanged until the next annual review unless STOXX´s fast exit and entry rules come into play. Under these latter rules, which are applied on a monthly basis, companies are removed from the index if they rank below the 75th stock in the universe or added if they rank above the 25th security based on market cap.
STOXX companies: In or out?
Among the stocks promoted to the Euro STOXX 50 in last year´s September review was sportswear manufacturer Adidas. The firm had seen its share price double over the year leading up to its inclusion, as changes to its operational and marketing strategy boosted underlying performance.
Netherlands-based food retailer Ahold Delhaize was also among those added to the index in the same annual review, with the company having been created through the recent merger of Dutch supermarket group Ahold and its Belgian counterpart Delhaize.
Meanwhile, Ireland-based manufacturer and supplier of construction materials CRH regained its place in the index, having been relegated from the top 50 two years earlier in favour of communication company Nokia. CRH achieved its comeback after successfully executing strategic acquisitions.
Companies ejected from the index in the most recent review included Italian banking group UniCredit and Italy-based insurer Assicurazioni Generali, highlighting the recent troubles of the nation´s financial services sector.
Flagging sales were partly behind the relegation of French retail giant Carrefour.
The Euro STOXX 50 is one of the most widely followed indices linked to the European stock market. It is an index of giants, representing the performance of the largest and most liquid stocks in the eurozone. The index´s concentrated nature means it can be relatively volatile at times, especially compared with indices containing much larger numbers of stocks.
Periodic changes in its composition can underscore wider business and macroeconomic trends impacting firms across the eurozone as the fortunes of STOXX companies ebb and flow.
At the same time, the index has a high degree of correlation with other major global equity markets, being additionally buffeted by changes in investor risk appetite towards capital markets as a whole.