Executive Summary
Global equity markets ended July on a positive note, supported by positive developments around several new trade deals during the month. The MSCI EM index registered gains of 1.7%, notching better returns than the MSCI World index, which posted 1.2% in July. The MSCI World Index has now effectively become a U.S. index in disguise, with the U.S. making up for more than 70% of the index. A drilldown into the U.S. markets shows that the M7 stocks account for nearly one third of the total market cap of U.S. equities. The next biggest markets – Japan and China each have a market size of less than 12% of the U.S. The skew in global markets presents a significant concentration risk, amplifying volatility and making portfolios more sensitive to swings in a handful of U.S. stocks. To put the problem in perspective, NVIDIA dwarfs Toyota in terms of market capitalization, with the latter having a market cap equivalent to 6.3% of NVIDIA. However, Toyota turns the tables from a revenue perspective, registering nearly twice the revenue of NVIDIA. The fix to this problem of high U.S. concentration could be moving away from a market-cap weighting of indices to a revenue-based, profit-based or even an equal weighting methodology.
