Despite rising tensions between China and the US, strong share price performance from a number of major tech and e-commerce stocks, including Alibaba, Tencent and Samsung, has driven a strong recovery for the MSCI Asia Pacific index
Tech and e-commerce giants in Asia have become something of a fan favourite with investors. Alibaba’s share price [NYSE: BABA] was boosted recently after it opted for a secondary listing in Hong Kong [HKG: 9988]. Tencent’s share price [0700.HK] is listed in Hong Kong but can be traded over the counter as an ADR via its TCEHY ticker simple, on the NASDAQ. Interest in Asia listings comes as tensions between the US and China is making many Chinese companies, particularly tech companies, reconsider where they list.
Alibaba’s share price is up 28.1% (through 17 June) from a closing low around the HKD170 level during the mid-March sell-off. This recovery has been matched by the performance of the MSCI Asia Pacific Index [MXAP], of which Alibaba is the top-weighted constituent. As of 17 June, the MSCI Asia Pacific Index was trading 30.7% above its March low of $121.54, according to data from Bloomberg. The rally seen by the index is not far off the S&P 500’s 39.16% gain in the same period.
Share price gains of the MSCI Asia Pacific Index since its March low
Strong performances for other top constituents Tencent [TECHY] and Samsung’s [005930.KS] share prices have also helped the index. Tencent and Samsung’s share prices have risen 31.6% and 28.6% from lows reached during the March sell-offs.
While the performance of the MSCI Asia Pacific Index and its constituents’ share prices is impressive it is not without its critics, who suggest the index is too heavily weighted in favour of mega-cap technology stocks (like Alibaba, Tencent and Samsung) — a trend being repeated across the globe.
Mega-caps with massive weights
The MSCI Asia Pacific index measures the performance of 1,585 large and mid-cap companies in 14 countries.
Japanese firms currently make up 37.64% of all the constituents, South Korean firms 7.07%, Chinese firms 23.15%, Australian 9.22% and Taiwanese firms 7.38%. Companies in the other nine countries it covers account for 15.55% of the constituents. It covers 85% of the free float-adjusted market capitalisation in each of the countries.
of the MSCI Asia Pacific Index made up of Japanese firms
The top five weighted companies include Alibaba, Tencent [0700.HKG], Taiwan Semiconductor MFG, Samsung [005930.KS] and Toyota [7203.T].
As of the 29 May, the top 10 companies had a combined total weight of 18.7% of holdings and their market caps make up 18.6%, or $1.655tn, of the $8.853tn total. Meanwhile, the top five have a combined market capitalisation $1.142tn — 12.9% of the overall market cap — while constituting 14% of the holdings, almost doubling from 8% in 2010, Bloomberg notes.
According to the publication, the strong performance of these tech giants “has led to highest concentration in the MSCI Asia Pacific index since 2001”.
Tech top heavy
This is similar to the picture in the US, where five massive companies — Alphabet [GOOGL], Amazon [AMZN], Apple [AAPL], Facebook, [FB] and Microsoft [MSFT] — dominate the S&P 500. They account for 20% of its total value, according to Goldman Sachs research.
The latest breakdown of the S&P 500 by sector shows that it’s weighted in favour of tech stocks. At the end of May, they constituted 26.2% of the index, almost double the next biggest sector, healthcare (15.2%).
of the S&P 500 made up of tech stocks
Back in February, before the market sell-off, Goldman Sachs’ analyst David Kostin had said the firm wasn’t concerned about the big five’s dominance. However, with more and more companies having seen their valuation and share prices drop, the S&P 500 is currently being propped up by a small number of companies — namely the big five. As a result, Kostin has changed his position.
In a note to clients in April, he wrote that the index’s reliance on just a few stocks could be problematic, highlighting that its breadth had also narrowed before the 2008 recession and the market slowdowns in 2011 and 2016.
There is a concern that the MSCI Asia Pacific index could find itself in a similar position. However, if there is a silver lining, it’s that the index isn’t as reliant on tech stocks as the S&P 500.
MSCI data shows that the Asia Pacific index’s current weighting is 17.2% for financials, 14.4% for technology, 10.71% for communications services, and 10.71% for healthcare
“The concentration in Asia is therefore not as much as in the US and such diversification in performance, we believe, is good for medium-term stability of returns,” Manishi Raychaudhuri, head of equity research for Asia Pacific at BNP Paribas SA, told Bloomberg earlier this month.
Depending less on tech stocks means the MSCI Asia Pacific index would be less exposed to potential volatility in the event that, for instance, Chinese tech giants were to be forcibly delisted by the US.
“The concentration in Asia is therefore not as much as in the US and such diversification in performance, we believe, is good for medium-term stability of return” - Manishi Raychaudhuri, head of equity research for Asia Pacific at BNP Paribas SA