Three of Asia’s big stock markets are each dominated by a single tech giant, a dynamic that fueled strong gains last year but is now becoming a source of frustration for some investors.
in Hong Kong,
Ltd. in South Korea and
Ltd. boast market capitalizations far bigger than most local peers. The trio’s collective valuation has fallen to about $924 billion, from a peak of $1.1 trillion in January, according to FactSet, as part of a selloff that has dented technology stocks globally.
The outsize influence is felt by portfolio managers, especially those whose performance is judged against single-market indexes.
“Investors have been heavily weighted those big stocks,” said
Caroline Yu Maurer,
Hong Kong-based head of Greater China equities at
Asset Management. She said the companies generating the biggest profits in an economy should naturally have the biggest market capitalizations, but added: “If they fail to deliver, people get concerned.”
Those distortions are one reason many portfolio managers prefer to compare themselves to more diversified measures. MSCI says $1.9 trillion is benchmarked against its emerging market indexes, which often can be more diversified and include more than one country.
Yet even these gauges are increasingly dependent upon Asian tech names, including the U.S.-listed Chinese titans
Indeed, those two along with Tencent, Samsung and TSMC account for 19% of the flagship MSCI Emerging Markets index. The MSCI China Index is even more concentrated, with Baidu, Alibaba and Tencent alone forming one-third of the index.
and Google parent
make up about 15% of the S&P 500’s weighting, even though the five together are worth considerably more in absolute terms than their Asian rivals and have become a bigger part of U.S. indexes in recent years.
Money managers in the U.S., too, have fretted about overly concentrated markets but recently the stock market has been able to withstand big drops from the likes of Facebook and Netflix Inc. The S&P 500 is up about this year and is shy of its record high by less than 2% through Friday’s close.
a portfolio manager at AllianceBernstein, runs a fund in New York spanning stocks, bonds and currencies that counted Tencent, Samsung and TSMC among its biggest shareholdings at the end of June. He has trimmed his stakes over the year, and these stocks make up less of his portfolio than the positions in the MSCI Emerging Markets Index, as he instead looks for growth elsewhere.
“We want to be careful not to concentrate excessively the way the index does in this narrow set of consumer-focused technology stocks in China,” Mr. Harting said.
In Hong Kong, Tencent’s $424 billion market cap is over 50% larger than the Hang Seng Index’s next biggest stock,
Tencent has been one of the worst performers among big global tech companies, losing a quarter of its value since hitting a record high in January. It is down about 14% in 2018.
Investors using low-cost funds to track the Hang Seng, like the $11.2 billion
have felt the pain. That fund has fallen 5.7% this year.
Investors and analysts say some doubt is growing over whether Tencent, the world’s largest videogame publisher by revenue, will be able to maintain elevated growth. In the first quarter, institutional investors in emerging markets cut their Tencent positions for the first time since the end of 2016, according to eVestment, a research firm.
In South Korea, Samsung’s nearly $300 billion market cap is bigger than the combined value of the next 11 biggest companies in the Kospi Composite. Samsung’s 10% drop this year has helped pull the Kospi down more than 7%, making it one of Asia’s worst performing indexes. And at $208 billion, the Taiwanese chip giant TSMC is over four times bigger than its nearest domestic peer.
Recent concerns are a mirror image of the problem investors face when big companies are rallying. For Ms. Maurer at BNP Paribas, no single stock can exceed 10% of a portfolio. As the Chinese tech giants surged last year, she wished she could have bought more. “Of course it’s frustrating,” she said. “Those stocks did very well, but that’s just the reality we have to deal with.”