Mega-cap tech dominance leaving market vulnerable

Managers at Platinum and Antipodes have highlighted the problems faced by the dominance of mega-cap tech names in global markets.

The S&P 500 was the best-performing market in 2021 with returns of 36.6% but five companies, Microsoft, Alphabet, Apple, Nvidia and Tesla, accounted for one-third of this return.

Apple, Microsoft and Alphabet were individually worth more than all listed Australian businesses combined, according to Factset.

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The dominance of these individual companies meant there were fewer companies which were outperforming the index, leading to higher market concentration.

“Low breadth and high market cap concentration isn’t a backdrop conducive to markets rising higher. It suggests the market will be more vulnerable to shocks,” Antipodes said.

“The market is crowding into an increasingly narrow subset of stocks- large cap tech.”

The firm referenced the HHI Index, which measures company size relative to total market capitalisation, and said it had reached “extreme levels”.

Platinum International fund managers, Andrew Clifford, Clay Smolinski and Nikola Dvornak, added the dominance of a few companies masked the performance of weaker stocks.

“These companies mask the weaker performance of stocks in general- markets outside the US offered only 14% (in AUD) in 2021. Successive waves of higher interest rates have shown up weaknesses in valuation arguments in hotter areas; we expect this continue in 2022,” Platinum said.

With this in mind, the Platinum International fund had zero exposure to the largest tech companies in its top 10 holdings and had only 20% allocated to North America.

However, the Antipodes Global fund held Microsoft as its largest holding at a 3.6% weighting, part of a 29% weighting to North America.

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