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Digital economy replaces bank stocks in European Index


Equity indices serve to measure the collective performance of a group of equities, typically representative of a region, strategy, sector, or a certain area of the market. In Europe, the Euro STOXX 50 Index is the region’s leading blue-chip index, representing the largest super-sector leaders in Europe by free-float market capitalisation. Following the annual blue-chip review by index provider STOXX, it is to no one’s surprise that the rise of the digital economy replaced some of the out of favour banking stocks, marking one of the biggest changes to the index membership.

Earlier in the month, STOXX announced the result of an annual blue-chip review, that became effective yesterday, September 21, 2020. The Index kicked off the week with five replacements in its underlying members, most notably with a larger representation to the digital economy, mainly through the addition of Prosus and Adyen, and the removal of banking names Societe Generale and BBVA.

In addition, the review also led to the removal of health care company Fresenius, and telecom companies Telefonica and Orange. This made space for the addition of the real estate company Vonovia, capital goods company Kone and beverage company Pernod Ricard.

Index membership is based on free-float adjusted market value at the end of August. Due to the COVID-19 pandemic, characterised by nation lockdowns, remote working and a shift to online consumer behaviour, companies forming part of the digital economy became even more relevant. This includes online retailers, internet companies, businesses offering food delivery and payment companies.

Case in point, Dutch payment company Adyen NV is one of the key beneficiaries to the accelerated trend of ecommerce. Adyen operates a global payments platform that integrates the full payments stack: gateway, risk management, processing, acquiring and settlement. Last August, the company reported a double digit increase in processed volume during its first half of the year, and a 27% gain in net revenue year-on-year.

Similarly, internet investor Prosus NV, is a global consumer internet group, which also holds a 31% stake in Chinese tech giant Tencent. Prosus holds a core ecommerce portfolio, that is expected to continue to benefit from the acceleration of underlying trend toward online ecommerce beyond the covid-19 crisis. Prosus core business segments are its classified business, food delivery and payments and fintech, which all recorded solid growth throughout the past few months.

While the shift in index membership is more representative of today’s growth companies, the inclusion of companies to equity indices has become increasingly important over the years. A company that gains membership to a widely followed index is expected to increase its appeal to a larger pool of investors, and benefit form an increase in passive investing.

Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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