Equity markets have become increasingly concentrated in recent years. The implication is that investors in a global equity index are no longer well diversified.
The strong performance of US equities since the Global Financial Crisis in 2008 has pushed valuations towards all-time highs and driven the region’s share of global market capitalisation to record levels. At present, the US accounts for over 72% of global developed equity markets.
The chart below, which shows the evolution of the weighting of US equities as a proportion of global equity market capitalisation, illustrates the trend of rising concentration. The level of US equity exposure now meaningfully surpasses the degree of concentration observed in the dot-com bubble of the late 1990s. Meanwhile, US GDP as a share of global economic output has remained fairly stable at around 25%.
Within the US equity market itself, concentration is also pronounced. Just ten companies account for almost 40% of market capitalisation, nine of which are technology related. Additionally, JPMorgan calculates that 41 firms tied to the artificial intelligence theme now account for 48% of headline US market indices.
As a result, investors in a global equity index are no longer well diversified. Instead, they are highly exposed to US stocks – and to US technology stocks in particular. Any disappointment in the development or profitability of AI technology could see a large number of index constituents fall sharply and in tandem. In contrast, the equity content of Heronsgate portfolios is well diversified across regions and sectors to mitigate concentration risk.
