The big seven firms are weighted as much on global indices as all Japanese, British, French, Canadian and Chinese companies
In the past, there were the FAANGs, the big five U. S. tech stocks that dominated the investment landscape: Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). This photo is now obsolete. Instead, say hello to what are known as the Super Seven or the Magnificent Seven: four of the above (the drop is Netflix) plus Microsoft, Tesla, and chipmaker Nvidia. The domain of this organization is the stock market story of 2023.
The chart below is “a classic,” says Duncan Lamont, head of strategic research at fund manager Schroders. It shows how, even if you invest through one of the broadest and most widely used “global” stock indices, you’ll end up with a portfolio that’s very American and very skewed towards American technology.
The index is the MSCI All Country World Index (ACWI), which covers about 85% of the “global equity investment opportunities,” as the compilers put it, measuring approximately 3,000 giant and midsize corporations in 23 evolved markets and 24 emerging markets. The more a company’s value increases, the higher its weighting in the index.
The seven are now so large that they account for 17. 2 percent of the total, while the combined representatives of Japan, the United Kingdom, China, France and Canada contribute 17. 3 percent of the total. Seven U. S. companies equals five countries. ” It’s far from a varied exhibition,” says Lamont. Apple alone, with a market price of $3 trillion, is more giant than the entire UK stock market.
The numbers are surprising, in part because of what is shown in the current chart. As of last week, the price of the Group of Seven is up 74% in 2023. Stocks in the rest of the world, within the same ACWI index, rose 12%. If his portfolio didn’t include the Magnificent Seven in 2023, it was hard to stay on top.
Is this degree of concentration healthy? In fact, this is unprecedented. Thanks to the momentum of the seven in 2023, U. S. stocks now account for 63% of the so-called global ACWI. Even at the time of Japan’s economic miracle, the country accounted for only 44% of the same index. “The U. S. has far surpassed Japan’s point of concentration in the 1980s, which everyone considered excessive at the time,” Lamont says.
Yet it would be hard to argue that the rise of the seven has been fuelled by the type of wild speculation that created the turn-of-the-century dotcom bubble. The 240% rise in Nvidia’s stock price this year may or may not be overdone, but it’s undeniable that the company’s order book for computer chips is booming as the artificial intelligence (AI) revolution arrives.
It would also be wrong to think of the seven as entirely alike. All have leading positions in growing markets and Amazon, Google and Microsoft have big cloud services divisions. But Amazon’s retail division has little in common with Google’s search business and Microsoft’s core software business is different again. All may benefit from AI, which helps to explain the stock market’s renewed love affair with technology in 2023 after a heavy “down” year in 2022, but the degrees will differ. Tesla remains, primarily, a maker of electric vehicles.
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Instead, it makes more sense to simply think about the implications of such excessive market concentration. In a highly exposed investment portfolio, much of the threat – in either direction – is transmitted through just seven securities.
Lamont makes a few points. First, the fact that, statistically speaking, the U. S. stock market is now priced at mind-boggling levels, doesn’t tell the whole story. Rather, it reflects the influence of the seven. ” American exceptionalism is not about each and every action,” he says. “It’s a small number that crushes everything in its path. “The average U. S. inventory is not expensive by classic investment standards.
Second, it’s possible to be disappointed when stocks are valued perfectly. The Schroders study found that periods of peak market concentration tend to be followed by periods of lower functionality across larger stocks. “This time could be different, and we’re in uncharted territory,” Lamont acknowledges.
It can also be argued that Schroders, as an active monitoring firm, is well advised that the pendulum is about to swing away from the passive followers of the index. But the basic point is intuitively correct: the existing concentration is extraordinary, investors might underestimate the relative lack of diversification. Timing is a game of possibilities, but a reversal turns out to be the way to go.