Sunniva Kolostyak: Big companies are dominating global markets. So today I am joined by Lena Tsymbaluk, our associate director of equity fund research, to talk about market concentration. Lena, thank you very much for being here. You’ve been looking at emerging markets in particular. How concentrated are these markets?
Lena Tsymbaluk: Yeah. So, everyone probably knows about the US market concentration and the Magnificent Seven stocks like Apple AAPL, Meta META, Alphabet GOOGL, Tesla TSLA, et cetera. But not everybody knows that emerging markets are concentrated as well. So the top emerging market names are TSMC 2330, Samsung Electronics 005930, Alibaba BABA and Tencent 00700, and together they make up around 20% of the market.
And as you can see, they’re all like in technology, the fastest growing sector, in line with the US market.
Kolostyak: So what about on a country level? Is it the same thing there?
Tsymbaluk: Yeah. At the country level, the market is also quite concentrated with the four countries, and they’re all Asian, actually, China, India, Taiwan and Korea, making up 80% of the market.
But what’s more interesting is how the dominance has been shifting from China to India. So India’s rate has doubled in the last five years, from 10 to 21%. And China is 25% now, but it used to be around 40% at some point.
Kolostyak: So that’s obviously size. We need to talk about the returns as well. We see the Magnificent Seven accounting for most of the returns of the S&P 500. So do we see the same kind of thing with these stocks as well?
Tsymbaluk: Yeah. Over the last five years, the two names TSMC and Tencent drove 50% of the benchmark’s return, which is quite a lot. And the situation is even worse in at the single country level with countries like Brazil and Taiwan. And it’s mainly because those markets are super concentrated. And the top five names, they drove most of the index returns there.
I’ll give you an example. For example, TSMC makes up half of the Index of Taiwan, and Samsung Electronics is 30% of Korea, and Petrobras PBR is 20% of Brazil.
Kolostyak: So does this make it harder to be an active fund manager in these regions?
Tsymbaluk: So according to our data, 35% of active funds managed to be their passive peers over the last five years. This number is slightly better over the last year. So 40% of active funds managed to be their passive peers. And this is mainly because many active managers took a negative view on China and were underweight. A lot of passive funds don’t have the flexibility to do it. So they were stuck with the index weight, which is a bit of a disadvantage compared to passives.
Kolostyak: So finally, when you talk about the investor, how should an investor think about market concentration in their portfolio?
Tsymbaluk: Yeah, concentration is not necessarily a bad thing in itself. It simply means that it can be difficult for active managers to beat their passive peers, especially during the times when this group, this tiny group of top names, are performing exceptionally well.
But investors should be aware that the markets can change and these top names, they can start underperforming. So there is a bit of a downside risk in concentration at the active level, and especially at the passive level as well.
Kolostyak: Lena, thank you very much for taking the time to speak to us today. For Morningstar, I’m Sunniva Kolostyak.
Read the report: Understanding Emerging Markets Equity Concentration
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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