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International Shares, Investments

Market concentration fears overblown

Global market Concentration Insync Funds Management US market

The view that global markets are becoming concentrated around tech stocks is not matched by reality but caution should be exercised with the local and Asian markets.

Global markets are not becoming more concentrated and investors concerned about this should actually look beyond the local market, an Australian global shares investment firm has stated.

Insync Funds Management head of strategy and distribution Grant Pearson said there was no evidence to support the common view international markets were becoming concentrated, but rather stocks were being mis-categorised.

“The chief investment officer of one of Australia’s biggest super funds recently said there is stock concentration in markets, being driven by an increase in tech stocks. Bloomberg has also recently made this statement, adding to a popular chorus across the media over the past year,” Pearson said.

He added Insync had examined five-year periods of the S&P 500, which represents industry sectors where most market capitalisation exists, starting from 1980 to test past levels of market concentration in comparison with the current focus on technology stocks and found the top 10 stocks over these periods held 18 per cent to 29 per cent of market capitalisation for the index.

While seven of the top 10 stocks were in oil in 1980, this had broadened to seven industries with around 20 per cent of market cap in total by 1985 and since then six to seven industries were represented in the top 10 stocks, he noted.

“While the top 10 stocks of the market remained in the 20 per cent-plus range from the turn of the century, it wasn’t until after 2020 that tech stocks increased and then to just three of the 10 positions,” he said.

“By 2023, there were six sectors represented in the top 10. With a year or so to go for the latest five-year period, it’s not a forgone conclusion that tech stocks will occupy the top slots.

“It’s worth reminding ourselves that stocks such as Meta and Google are not classified as tech stocks but communication stocks. Apple, Microsoft and Cisco are ‘technology’ stocks and Amazon is a ‘consumer discretionary’ stock.”

He said Insync also examined if the United States market was too concentrated, but found that compared to Italy, France, Germany, the United Kingdom and Canada, the US currently has the lowest stock concentration profiles, and if Australian investors wanted to avoid concentration, they should be cautious about Australian and Asian markets.

“China’s top five stocks occupy 38 per cent of its market and its top 10 a whopping 57 per cent. South Korea has 49 per cent in its top 10 with 22 per cent alone in industrial behemoth Samsung, but Australia is the worst of all with around 60 per cent in its line-up,” he said.

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