Mega Cap Tech Dominance: It’s Not Just The U.S.

The phrase mega-cap tech is often strongly associated with the U.S. equity market, to the point that household heavyweight names such as Apple AAPL, Amazon AMZN, Facebook FB, Google GOOGL, and Microsoft MSFT are typically the first words that spring to mind when the phrase is mentioned. And it’s no surprise why: after all, it’s widely known among investors and asset owners alike that the key determinant for beating the market in 2020 was the allocation to the top names in the S&P 500 ® Index in their U.S. equity portfolios, given their stellar outperformance last year.

Lesser known to many investors, perhaps, is that very similar dynamics have also taken place recently in the emerging markets (EM) asset class. 2020 exacerbated this trend of mega-cap tech dominance, with tech names in emerging markets benefiting from widespread stay-at-home measures as the COVID-19 pandemic erupted. Similar to the U.S., a narrow list of names has produced monstrous returns well ahead of the rest of the market in both the coronavirus-led market selloff as well as in the rebound that followed. For those less familiar with this asset class, the top five emerging-market index names are:

  • Alibaba (digital platform including retail, social media, and financial services)
  • TSMC (global leading electronic chip manufacturer)
  • Tencent (online gaming, social media platform)
  • Samsung (electronics)
  • Meituan (food delivery app)

While the individual stock names are of course different, the trend bears more similarities than differences. In other words, mega-cap tech is not just a U.S. thing. Before we look into the 2020 experience and the role mega-cap tech has played, let’s revisit the composition of emerging markets in order to illustrate some high-level comparisons with the U.S. market.

Emerging markets have moved well beyond being a play on commodities

Many asset owners still associate an EM allocation as a play on commodities—in other words, the place to go to gain broader exposure to commodities such as oil or grains. This notion belongs well in the past, as the MSCI Emerging Markets Index’s weight of both digital consumption and internet-themed businesses—sectors of the so-called new economy—has ballooned over the past decade. 

For instance, the consumer discretionary and communication services sectors (which capture a significant amount of internet-themed companies) have doubled in weight in the last 10 years and now account for close to one-third of the total index. The increasing prevalence of e-commerce is also apparent, as reflected by the significant 13% index allocation to the internet and direct marketing retail industry within the consumer discretionary sector. This all stands in stark contrast to what the EM opportunity set looked like only a decade ago when the more traditional EM sectors of energy and materials accounted for close to 30% of the index. Notably, this weight has shrunk to less than half of that today.

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