Quality Insights: Navigating an increasingly concentrated market

The narrow leadership in global equities is unprecedented. It is also dangerous. Clyde Rossouw, Head of Quality at Ninety One, explains why markets do not appear as healthy as the headlines suggest, and that there are several warning signs that investors should be cognisant of.

Recent dynamics in the equity markets have been unprecedented. Headline figures suggest that equities marched on upwards in the first half of 2024, driven predominantly by US tech euphoria as we move towards a future dominated by artificial intelligence. However, while this is completely accurate, a closer examination helps understand the full extent of this narrow market and unveils some warning signs that investors should be cognisant of.

When looking at the global equity benchmark – the MSCI ACWI – which captures close to 3,000 companies across nearly 50 developed and emerging markets, it rose by 11% in the first six months of the year. On an equal weighted basis – stripping out the effect of market capitalisation – it was up closer to 1%, and actually fell in the second quarter. Analysis of the predominant drivers of the index paints an even more stark picture. The IT sector within the ACWI is up close to 25% this year, however this becomes 1% on an equal-weighted basis, with similar dynamics at play in communication services.

Source: Ninety One, FactSet, 30 June 2024. Chart shows year-to-date total returns, in USD, of the MSCI sectors.

Closer inspection of the core drivers – a handful of megacaps – also illustrates the extraordinary nature of today’s market. During the famed dotcom bubble at the turn of the century, the top 10 of the S&P accounted for just over 25% of the full 500-member index. Following its collapse, this drifted down to about 15% about a decade ago, but since 2014, the concentration has crept higher again, before surging up above 35% in the past couple of years. This leaves any investors exposed to the full index – or an overweight towards these tech behemoths – open to a significant amount of concentration risk should sentiment turn.

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