It appears to be a US dominated world
Five technology companies now dominate world equity indices. The investment landscape has been changed by their success.
The latest figures for the MSCI All World equity index show that US shares make up 57.6% of the total. The next largest country representation is Japan, at just 6.87%. China, the world’s second-largest economy, provides just 4.11% of this representation of world quoted wealth, reflecting the high proportion of the Chinese economy that is still nationalised or restricted in some way.
Even more striking is the impact a few very large and successful technology companies have had on the world index. The five largest companies are all American. Between them, Apple, Microsoft, Google (Alphabet), Amazon and Facebook account for just under 10% of the index value. In other words, those five companies exceed the total value of the whole Japanese stock exchange, and exceed the combined value of the French, German and Dutch exchanges, the three largest in the EU.
Changing the investment landscape
This has implications for analysts and commentators on world markets. Conventional research into national economies, central bank policies and currencies can still guide investors over the balance to hold between German, US, Japanese, Chinese and other country shares. This needs to be supplemented by an understanding of a few mega-companies in the US, which now dwarf even large economies in the main indices.
The arrival of the US technology companies in this dominant position is not just hope, value or markets exaggerating a trend. The early enthusiasm for all things technology that powered the technology stocks to amazing highs in 2000 was well ahead of events. Companies with little revenue and large losses were swept up in a passion for the future, the coming of which was then a bit delayed. There was a big sell-off when reality intruded.
This latest enduring bull market in technology stocks starting in 2009 has long since passed the old highs of 2000, but this time the major companies not only have revenues and good growth, but are also generating cash and setting out exciting plans for future expansion.
History and logic tells us that a few companies and a dominant sector do not go on forever expanding at the expense of the rest. Technology companies have their critics. Compound arithmetic points to lower growth rates the bigger they become. Many governments are looking for better ways to take a larger share of their revenues or profits. Many campaign groups want to regulate them more and force their cost base up. Maybe new challenger companies or sectors will appear that succeed in wrestling growth and revenue away from these giants.
The old economy suffers
Meanwhile, many traditional businesses and sectors still struggle to keep up and to contain the damage change can do to them. Retailers with too many shops can continue to lose out to all online competitors. Traditional financial institutions can lose customers to fintech alternatives. The car industry is going through its own agony as governments demand more rapid phase-out of all their current main products using oil-based fuels. The energy sector is under strict instructions to phase out fossil fuels which are still the main part of its revenue and asset base.
In this fast-changing world, the US and its technology masters currently hold a dominant position. It is easy to see the threats to them both, but more difficult to see what might overtake them. Markets this year are likely to be less enthusiastic about growth prospects than they were last year, given the various problems with growth and governance. The battle over US technology could become bigger for investors than the presidential election itself.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.