What next for equity market sector trends?

The top ten companies in the world index are dominated by US corporations and they are mainly technology based.

| 5 min read

During the pandemic, the stocks of the digital revolution have become ever more prominent in world indices. The World Index reflects the dominance of the USA in the companies and sectors that figure most prominently. The surge in the US share of world markets has come in line with the rise of the US technology giants. The top ten companies in the world index are dominated by US corporations and they are mainly technology based. In the wider All World Index, which includes developing markets, the US internet leviathans are still prominent, though Taiwan semiconductor makes it into the top ten. TSMC is of course a leading supplier to the US industry.

A changing picture

Energy has shrunk to just 3.4% in the All World Index. This latter includes all the quoted oil and gas of the world which still powers and heats most things. It is curious that energy has fallen so low. Quoted property, mainly commercial, is just 2.7% of the advanced world index. That is also quite a low proportion. Utilities rest at 2.7%. If you were to distinguish the main features of an advanced economy from a poor country you would probably instance the ready availability of affordable power for home heating, industrial process and transport through well connected pipe and delivery systems. You would probably add the availability of drinking quality water in taps in every home, and remember the much better average quality of property in an advanced country. These advantages no longer command much stock exchange premium for their delivery. Instead, the wish of the leading countries to end fossil fuels helps depress valuations.

The low level of property partly reflects the fact that much of it is owned directly and not through quoted companies. It also now reflects the Chinese wish to reform or bankrupt Chinese property companies. Valuations of advanced country shops and some offices have been adversely affected by the trends to more online retail and to more homeworking.

So, what has been winning? Information technology is now the largest sector at 24% of the World Index and the All World Index. Consumer discretionary is a little over 12 % of the World and All World, which now includes Amazon and others that are drivers of the digital revolution for consumers. Financials have kept second place at around 13%, slimmed down by the banking crash and then by the pandemic lockdowns and ultra-low interest rates. Healthcare has sustained a fairly strong position around 12%, helped by people living longer and needing more treatments in old age. Some have also benefitted from the big demand for pandemic vaccines. Communications, the sinews of the digital revolution, accounts for 8.4%.

If you look in more detail at the emerging world, that is now dominated by China at 30% of the emerging world index and Taiwan at 16%, with a tech savvy South Korea at 13%. Leading companies in that index include the Chinese digital giants alongside Taiwan semiconductor and Samsung with their big links into the western and US led digital world.

This illustrates that the world markets have all worked in harmony to promote and celebrate the success of the digital companies, and to downplay or downgrade traditional industry, energy and property. Just as US exceptionalism leads people to ask if the trend has gone far enough, contrarians will now be asking if they can find new trends and better value by betting against the technology dominance of recent years. It may well be that some of this works in 2022 as the digital companies fall back to more normal rates of growth after the extraordinary boost they received from lockdowns. However, the underlying trends of growth in social media, online retail, downloaded entertainment and remote working, alongside substantial data driven requirements from business, will continue, and underpin the advances these sectors have made in recent years.

Performance less concentrated?

No sector or small group of companies survives indefinitely at the top. Some are brought down by bad management and arrogance. Some are cut back by government regulation and taxation. Some are simply surpassed by new technologies and ways of doing things, or new customer priorities as products and services evolve, or by newer and hungrier competitors. So far, the digital leaders have kept their intensity and their drive and have been able to attract many more customers and adapt their offering to provide a wider range of consumer satisfactions. 2022 is likely to see them still deliver well as other sectors seek the limelight from reduced controls on travel and social contact as they arise.

Much will rest on the progress of the virus, the continued pace of recovery and how the major Central Banks handle the rise in inflation we have experienced. There will be plenty to manage and comment on as 2022 unfolds. There may be a bit more balance in sector performance than we have witnessed in the two Covid years which played to the digital giants’ strengths.

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What next for equity market sector trends?

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