Global equity market concentration has reached its highest level in decades.
The 10 largest stocks in the MSCI All Country World Index now account for 19.5 per cent of the widely followed benchmark of 23 developed and 24 emerging markets.
According to MSCI data going back to 1994, this ratio was less than 9% in 2016, well above the “dotcom” era peak of 16.2% in March 2000.
In the MSCI World Index, which covers only developed markets, 10 heavyweights, all US companies, currently account for 21.7 per cent of the total market value, bringing the US share of the index to almost 71 per cent.
The companies that make up the ‘Magnificent Seven’ are: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Dimitris Melas, head of MSCI index research and product development, said the concentration was “certainly higher than it has been in the last three decades, possibly longer”.
The degree of concentration is even higher, as the top 10 includes two separate share classes of Google’s parent company Alphabet, as well as five other stocks from the so-called ‘Magnificent Seven’ and three other US companies (Eli Lilly, Broadcom and JPMorgan).
According to Elroy Dimson of Cambridge University and Paul Marsh and Mike Staunton of the London Business School, the 10 giants account for 28.6 per cent of the total market capitalisation of US markets, up from 11.9 per cent in 1995 and the highest level since 1966.
According to the Financial Times, the growth of the global giants poses a potential risk to investors seeking the benefits of diversification, traditionally favoured by investors as a way of boosting returns without taking on additional risk, in index-tracking instruments such as exchange-traded funds.
“With 71% concentration in a single country, investors are disproportionately exposed to the US macroeconomic environment and primarily US investor sentiment, and you don’t get the diversification you might expect from investing in a global ETF,” said Todd Rosenbluth, head of research at VettaFi, a consultancy.
Concentration in both the US and global equity markets has risen rapidly after falling between the 1960s and the 2007-08 crisis.
Marsh believes this trend is linked to the increasingly oligopolistic nature of many sectors: Data from the LBS team shows that in 1900, during the era of the ‘robber barons’, the top 10 stocks accounted for 38.1 per cent of the US stock market.
“The industry concentration we’re seeing now is all about technology. What we’re seeing in the technology sector is monopoly power, but not the kind of monopoly power that regulators are used to regulating,” says Marsh.
