Over the past few weeks the MSCI World market cap weighted index has extended outperformance over its equal-weighted index to levels beyond even what we saw in 2008/09. Relative gains are now concentrated in the fewest number of stocks in over a decade. Evidence of this narrowing can be seen across regions, including emerging markets, but a closer inspection shows that much of the concentration in performance is in the US tech giants, while cyclical stocks have lagged. This makes sense; investors have continued to focus on companies that are larger and have more resilient businesses as the recession bites. 

What does this mean for investors?

The bullish case for tech states that during economic lockdowns to contain the spread of Covid-19, people rely more on digital services, such as online content and e-commerce. Even after the lockdowns end, it’s unlikely that this digitisation will reverse. 

But narrow markets are not usually considered a sign of strength. Instead, previous declines in market breadth have often preceded sell-offs, such as in 2000 and 2008. Caution is warranted in the current environment, and equity investors need to remain nimble. Good stock selection is becoming even more valuable, whether to protect gains or to benefit as the gap between winners and losers widens further.

Stuart Rumble

Stuart Rumble

Investment Director

Bob Chen

Bob Chen

Mark J Hamilton

Mark J Hamilton