Global Dominance of Major Stocks at Highest Level in Decades

The concentration of the global stock market has risen to its highest level in decades, increasing risks for passive investors.

The ten largest stocks in the MSCI All Country World Index now account for 19.5 percent of the widely followed benchmark of 23 developed and 24 emerging market countries. This is an increase from less than nine percent as recently as 2016 and significantly above the dot-com peak of 16.2 percent in March 2000, according to MSCI data dating back to 1994, as reported by the Financial Times.

In the MSCI global index, which covers only developed markets, the ten heavyweights (all American companies) now make up 21.7 percent of the total market capitalization, meaning that the U.S. share in the index is nearly an astonishing 71 percent.

The concentration is ‘at its highest level, certainly in the last three decades, potentially even longer,’ Dimitris Melas, head of index research and product development at MSCI, told the FT.

The degree of concentration is actually even higher as the top ten includes two separate classes of Alphabet shares, the owner of Google, along with five other stocks known as the Magnificent Seven and three other American companies: Eli Lilly, Broadcom, and JPMorgan.

Within U.S. markets, the ten giants now account for 28.6 percent of the total stock market capitalization, up from 11.9 percent in 1995 and the highest level since 1966, according to data from Elroy Dimson of Cambridge University and Paul Marsh and Mike Staunton of the London Business School (LBS).

The rise of global giants potentially poses a risk for investors seeking the benefits of diversification, which investors traditionally crave as a way to increase returns without taking on additional risk, in so-called index-tracking vehicles such as exchange-traded funds.

– With a concentration of 71 percent in one country, investors are disproportionately exposed to the macroeconomic environment of the U.S. and primarily the sentiment of American investors, and you do not get the diversification you might expect from investing in a global ETF, said Todd Rosenbluth, head of research at consulting firm VettaFi.

In the last decade, collective wisdom has suggested that the best money would be to put into a global tracker and forget about it, believes Nicholas Hyett, an investment manager at Wealth Club in the United Kingdom.

– After all, what better diversification could there be than a small investment in every listed company in the world? But lower risk does not mean there is no risk. During the financial crisis (2007-08), the global stock market fell by nearly 40 percent. Today’s more concentrated stock market is prone to significant declines in value, Hyett added.

The concentration of the U.S. and global stock markets fell between the 1960s and the 2007-08 crisis before sharply rising.

Marsh believed that the trend is related to the increasing oligopolistic nature of many industries: LBS team data indicates that the ten largest stocks accounted for 38.1 percent of the U.S. stock market in 1900.

– The industry concentration we see now is all about technology. What we have seen in the tech industry is monopolistic power, but not the kind of monopolistic power that regulators are used to regulating. It is more like some kind of natural monopoly. These dominant companies tend to experience exceptional growth, and regulators are hesitant to decide whether to break them up in some way, Marsh added.

Nate Geraci, president of The ETF Store, said that investors might benefit at some point from avoiding dominant large-cap stocks, but that it is ‘extremely difficult’ to time any change.

– It is important to remember that long-term investors have significantly benefited from this rising concentration as the largest stocks have risen in the last decade. Could this work the other way to the detriment of investors? Of course, but if we have learned anything in the last few years, it is that trying to time the collapse of market-capitalization-weighted indices is a foolish thing, Geraci commented.