Under the bonnet: Stock markets – spot the difference

Countries apart

In the globalised, homogenous business world, it is surprising that there are any noticeable differences between one stock market and another. The truth is, however, that the differences are big and significant.

Take this year, for instance.  As we know, commodity prices have been strong following the bounce back from Covid and the Russian invasion of Ukraine. This has helped the UK’s FTSE 100 Index, which has had a positive return of 4% year-to-date compared to the -6% for the global equity index. (Source: FE Analytics to 1^st June)

This is largely due to the fact that in the UK, oil, gas and mining companies comprise a large percentage – around a quarter – of the overall market, compared to just 9% for the global index.

However, the UK’s performance pales into insignificance when you look at, say, the Brazilian stock market.  This index is up by a massive 36% due mainly to the market having nearly half in the commodity and energy sectors.

This is just one example, but there are many other differences between country markets that drive them to perform differently.

Monster Mobile

One extreme example was the Finland stock market in the late 1990’s.  This market was not dominated by one commodity or one industry, but by one company.

At the time, Nokia was selling nearly half of all phones sold in the world and had become a very large, global company.  However, in terms of the Finnish stock market, it had become a Goliath and reached 70% of the value of the whole index!

As investors joked at the time, if you’re buying Finland, you’re buying Nokia.

FAAMG Tango

Whilst the Finland stock market did not appear in many portfolios, the US stock market is almost certainly held by most investors today.  The US market has seen one of the largest and most enduring differences compared to almost every other stock market in the concentration of technology and technology-related companies.

At their peak last autumn, the technology giants Facebook, Amazon, Apple, Microsoft and Google (FAAMG) combined, accounted for about 25% of the value of the S&P 500 Index.

To give some idea of the sheer scale of these companies, the value of the US technology sector last year exceeded that of the whole of the European stock markets combined, including the UK and Switzerland.

For context, back in 2007, Europe was four times the size of the sector.*

This has had a very significant effect on performance.

According to the business magazine Forbes, they estimate that the 5 FAAMG stocks alone, accounted for 72% of the 23% return of the S&P Index since the end of 2017. Indeed, they calculated that just 15 companies in the Index account for approximately 96% of the gain – which means each of the stock performances of the other 485 companies essentially returned nothing!**

This skew in returns meant that technology stocks became ‘must-haves’ in US portfolios, not only for their size, but the fact they accounted for almost all the performance.

This can be a curse or a blessing.

The blessing is that you only needed to have a few of these ‘super stocks’ in your portfolio to achieve out-sized returns.

The curse is that the massive momentum over a number of years results in rising investors’ fear of missing out and fund managers’ career risk of not holding the stocks in their funds. This has resulted in the vast majority of portfolios chock full of such stocks which, inevitably, reach very high, or ‘bubble’ valuations.

And we all know what happens then, as we are starting to see this year, with the precipitous falls in some of the technology stocks.

Pick ‘n’ Mix

Knowing the characteristics of each equity market is very important to not only driving great performance, but avoiding the risks too.

Knowing, for example, the Norway stock market is (largely) vulnerable to weak oil prices, Singapore is highly concentrated (c.60%) in financial companies, or that Taiwan has a similar large weighting in its stock market index in technology stocks, can keep you from making big losses.

Conversely, knowing Switzerland is a relative safe haven stock market (and currency) with nearly 60% of the market in healthcare and consumer staples companies, can help with capital preservation.

Indeed, some markets are not what they may seem – the Saudi Arabia stock market, for example, has less than half the weighting in oil and gas as the UK stock market.

What this means is that investors need to be careful about their selection and mix of holdings. It’s easy to inadvertently take on extra sector or commodity risks when you think you are lowering risks by diversifying your geographic spread of holdings.

*CNBC.com: “US tech stocks are now worth more than the entire European stock market”

** Forbes.com: “The FAAMG Stocks Drive The Markets”

Past performance is for illustrative purposes only and cannot be guaranteed to apply in the future.

This blog is intended as an information piece and does not constitute a solicitation of investment advice. If you have any further questions, please don’t hesitate to get in touch with us on 0808 156 1176 or by reaching out to your usual Equilibrium contact.