Is Concentration Risk in the Stock Markets Already Too High?

The three largest US companies are now worth more than the entire Chinese stock market. This development can also be viewed from a Chinese perspective to explore the causes of the economic downturn of the world’s second-largest economy. However, the history of major US technology companies is more one of strength than of relative weakness. The question remains, though, whether this dominance has already advanced too far.

Stock market: US Top 3 vs. Chinese market

Concentration Risks: Not a New Phenomenon

Concentration risk describes the phenomenon where a significant portion of investments or a very high percentage of stock indices are limited to a few stocks. The performance of these few stocks determines the index’s performance. However, this also brings the risk that if just one stock performs poorly, the entire index can be significantly affected. Concentration is not a new phenomenon per se. Historically, the largest companies at any given time consistently took up a significant portion of the market capitalization weighting in the MSCI World Index. Looking back more than 20 years, this can be well illustrated, but a concentration like the one we are currently experiencing has never occurred in the period from the end of 1998 to the end of June 2024.

Such high concentration was last observed in the US in the 1950s. However, this is not exclusively a US phenomenon. In other markets, the performance is also driven by a few names: in the Austrian ATX, approximately 60% is accounted for by the largest five companies, and in the German DAX, the ten largest companies make up more than 60% of the composition (Source: Bloomberg Finance L.P., as of June 28, 2024). What distinguishes the US market from the rest of the world is the importance of the US stock market for global indices. About 70% is now accounted for by US stocks (based on the MSCI World Index, source: MSCI Inc., as of June 28, 2024), thus gaining more importance for global stock market developments when following indices, as is customary in the financial world, with a market capitalization weighted methodology.

Anti-Concentration Measures

The conclusion: One should never put all eggs in one basket. The heavyweight companies of the past eventually had to yield to (new) emerging companies. Sufficient diversification can mitigate losses during stress phases or major shifts. To wrap it with the most well-known disclaimer in the financial world: “Past performance is not indicative of future results and yields of an investment.” Being aware of this can help avoid unpleasant surprises before making an investment.

The aim of this information is to provide a general overview of current market data and the market opinion of Kathrein and does not include a direct or indirect recommendation for a specific investment strategy as defined by financial analysis. Investing in securities is subject to price fluctuations due to changes in the market. Statements and representations referring to the past do not allow any reliable conclusions about future results.