Stocks News

Column: Stay focused on concentration

LONDON (Reuters) - For those worried about the dominance of global technology titans in their stock portfolios, recent antitrust actions may seem like the perfect moment to cut and run.

Trading information is displayed on the screens at the Nasdaq Market Site in Times Square, New York City, New York, U.S., March 6, 2020. REUTERS/Andrew Kelly

Yet since September’s tech stock wobble there appears to be little sign of investors heading for the doors, despite long-standing unease at the overloading of equity benchmarks.

Even the House of Representatives panel broadside against the four ‘Big Tech’ firms, Amazon, Apple, Facebook and Google, has not scared the horses and by stopping short of calls for any specific break-up, may even be seen as a relief.

So after what might otherwise be seen as bruising month, the tech-laden Nasdaq has nevertheless outperformed the wider S&P500 and MSCI’s all-country index by 1%.

And New York’s narrower FANG+TM index , which includes Facebook, Apple, Amazon, Netflix and Google-owner Alphabet alongside Tesla, Twitter, Nvidia, Baidu and Alibaba, has outperformed by 6%.

While relatively modest compared with a year-to-date outperformance of more than 70%, it is impressive in the circumstances. And yet it’s done little to soothe nerves.

For many, it merely underlines a staggering skew in stock market performance to its leading lights - where Apple, Microsoft, Amazon, Facebook and Alphabet’s collective market cap of almost $7 trillion is now a quarter of the whole S&P500.

Such concentration is not just a U.S. phenomenon.

Societe Generale’s Andrew Lapthorne points out the Top 10 stocks are now responsible for all this year’s upside in the S&P500, MSCI World and MSCI emerging markets indices and 50% of Asia ex-Japan benchmarks.

On the yawning gap between out-of-favour “value” and tech-dominated “growth” stocks, Barclays’ Emmanuel Cau highlights the 8% tech weighting in MSCI Europe is now bigger than banks or energy. It was a quarter of both 10 years ago.

The gap between the growth and value stocks share of the MSCI World, meantime, is now the widest since 2000. And the divergence in price and market cap means regular index re-weightings merely exaggerate the problem.

“The extreme market polarisation between winners and losers is unhealthy and probably unsustainable,” Cau and the Barclays team wrote. “Portfolio concentration has thus become a risk for addition to the macro uncertainty.”


Some of the largest asset managers tend to agree.

UBS Global Wealth Management’s chief investment officer Mark Haefele on Tuesday urged clients to diversify beyond tech even though he does not see it as a bubble yet and feels this week’s House antitrust report could arguably be read “neutral-to positive” by avoiding explicit ‘breakup’ calls.

“Now is time to also consider rebalancing some mega cap exposure to other longer-term technology themes,” he wrote, adding value in a “more normal” economic themes should now be considered even if retaining some mega caps is advised.

That absence of panic is partly because high market concentration of winners is not that unusual.

Steef Bergakker, portfolio manager at Robeco, said a typical U.S. stock listed from 1926 to 2019 would have recorded a buy-and-hold loss of 2.8% over its entire lifetime even though the average market return was about 8% over the last 100 years.

Citing a study by Professor Hendrik Bessembinder from Arizona State University, he said just 4% of listed U.S. firms were responsible for all wealth creation in the past 90 years.

Stock investment, the Robeco manager added, has always been about identifying mega-trends. The software industry has ‘created’ $4.1 trillion in wealth for investors since the 1960s while the precious metals industry ‘destroyed’ $17 billion.

But should political sabre rattling about concentration force markets into a rethink?

JP Morgan’s long-term strategists Jan Loeys and Shiny Kundu said the history of antitrust means the case against Big Tech was less than clearcut, with genuine fears of anti-competitive practices offset by a more benign theory of “superstar” firms.

Loeys also reckoned the issue would not be top of Democrat Joe Biden’s long “things to do” list if he defeats Donald Trump in next month’s U.S. presidential election.

And Europe’s renewed appetite for corporate “champions” may even see the tables tip toward further industry intensity.

“If we are right, overall market concentration is unlikely to come down much - with digitalization, the post-pandemic world and the rise of national champions biasing the future towards further increases,” he wrote. “But we need to accept two-sided risk, especially, if Biden wins the presidency.”

The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own.

by Mike Dolan, Twitter: @reutersMikeD; Graphics by Thyagu Adinarayan; Editing by Alexander Smith