Patrik Schowitz

Volatile tech stocks expose growing vulnerability in US market

The domination of a few tech giants means the US stock market is more vulnerable to both narrow bull runs and sharp reversals in investor sentiment

In Hong Kong, the trend of Chinese companies listing in the city is making the market more diversified as it becomes more closely linked to the mainland economy

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The traditionally defensive US equity market is looking like a much riskier bet these days. Photo: AFP

Patrik Schowitz

Published: 2:30am, 12 Sep 2020Updated: 4:36am, 12 Sep 2020

After surging through the summer, technology stocks have recently unnerved investors by starting to bounce around. This has put a spotlight on just now narrowly concentrated the US stock market is on a handful of large companies.

This is actually fairly common in smaller equity markets dominated by a small number of national champions. Taiwan and South Korea are good examples, with TSMC accounting for nearly a third of the Taiwan Stock Exchange index and Samsung Electronics for over 20 per cent of the Korea Exchange index. Even in the MSCI emerging market equity index, the 10 largest stocks account for nearly a third of the total value.

The problem with this is not hard to see: it can leave a national or regional equity market vulnerable to bad news concerning just a few companies or one sector in the economy, like a farmer who has only planted one type of crop and risks financial ruin at harvest time if that particular crop is wiped out. The opposite can also apply, of course. When that dominant company or sector does well, it lifts the overall market.

This issue might be less concerning for smaller markets since investors can diversify their risk by spreading their money across a range of markets or, indeed, do the opposite and invest across single companies to reflect their views and preferences.

The latest Apple store in Singapore. Apple is one of the five tech giants dominating the S&P 500 index. Photo: @marinabaysands/Instagram

However, it is a different story when a tiny club of powerhouse companies dominate the run-up in the largest equity market in the world. With a value of around US$30 trillion, the US accounts for nearly 60 per cent of the global equity market universe and is seen both as a barometer for the health of the global economy and as representing a huge share of global savings.

The narrow bull market has been almost entirely driven by the huge success of just a small number of so-called mega-cap technology stocks. Before the latest volatility, the top five largest stocks in the US benchmark S&P 500 index accounted for around a quarter of its total value. Reflecting just how rich valuations had become, their share prices had risen by over 50 per cent in the first eight months of the year, while the overall market had gained just 11 per cent.