Any review of the holdings of global pension funds, unit trusts, hedge funds, passive exchange traded funds and retail investor portfolios shows that almost all are heavily exposed to a narrow group of securities.
The 10 largest constituents of the FTSE/JSE all share index returned 49% over three years. The other 127 shares in the index — comprising only 38% of the weighting of the index but representing 93% of the number of stocks in the index — declined by 29% on average over the same period. This discrepancy in recent performance by popular mega-caps can be explained by superior earnings growth and a widening gap in valuations between the mega caps and the balance of the market. The impact of the Covid-19 pandemic on cheaper, more cyclical stocks has been severe.
The share prices of secular growth stocks such as Amazon, Microsoft and Tencent have increased dramatically in the past few months, as investors rushed back into equities after the March sell-off. Tech-heavy indices such as the Nasdaq, S&P 500 and the all share index have thus staged remarkable recoveries — the S&P 500 recouped all its 2020 losses in June while the Nasdaq was hitting record highs.
It is alarming that the most expensive stocks, tech ones, have become “safe havens”. In recent times bad macro headlines — such as a rise in Covid-19 infections in the US — have caused the Nasdaq to rise when “risky” assets such as cyclical equities decline.
Source: News Formal (newsformal.com)
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