Magnificent Seven market concentration is a problem everywhere, not just on Wall Street
‘Market concentration’ is a phrase on the lips of a lot of the market right now, especially as the Magnificent Seven tech stocks continue to swell in size.
The Magnificent Seven is made up of the Big Five tech stocks; namely Alphabet, Amazon, Apple, Meta and Microsoft, plus Nvidia and Tesla.
Making up more than 31 per cent of the S&P 500 in the US, analysts have begun to warn that too much of the American stock market is tied to too few stocks.
While it is most obviously a problem in the US, market concentration isn’t solely a problem there, but everywhere.
Every region is seeing a rise in the weighting of its top five biggest stocks, data from Morningstar revealed, as worldwide, the share of the top five biggest companies on a global index has tripled since 2008, from five per cent to 15 per cent.
In fact, despite the notoriety of the Magnificent Seven, the top names in Asia and the emerging markets now account for a much larger share of respective index returns, with the former’s top five stocks making up 20 per cent of the market.
At the start of 2019, that number was around 15 per cent. In 2014, it was closer to 10 per cent.
Within Europe though, while market concentration has been rising as well, it is much more muted and the difference to the previous peak in concentration in 2008 is not nearly as large as in the US.
In Europe, the five biggest stocks of Novo Nordisk, ASML, Nestle, Astrazenaca and Shell make up 14.5 per cent of the index.
Europe’s top five stocks are also different to the US in two key ways: For one, they have returned only half of the gains from the US stocks since 2008.
Instead, the top five European stocks have only had an annualised return of 6.6 per cent.
Secondly, while the top US stocks mostly reside in the technology and communications sectors, today’s European heavyweights are more diversified by sector, with representation across the IT, healthcare, consumer, energy and financials sectors.
“In terms of investment style for European equities, market concentration has been most pronounced in the growth space, whereas it has remained fairly moderate among value stocks,” said Natalia Wolfstetter, director of manager research at Morningstar
“Recent history suggests that a certain level of concentration is necessary for funds to land in the top performance quartile in periods of narrow market leadership, particularly in the blend and growth categories. The relationship between concentration and relative performance is less clear-cut among value funds.”