Three Concentration Risks In The British Stock Market

Concentration risk is one of the risks that investors in the British equity market must be aware of.  Though the UK is one of the largest economies in Europe and in the developed world, its equity market is highly concentrated with select sectors and companies dominating the market. So British investors are wise to diversify holding equities from other countries to alleviate the risks of domestic market.

Sector Risk:

The UK stock market is concentrated in some sectors. For example, financials and natural resources are two of the largest sectors in the FTSE 100. Financials (banks, financial services and insurance) account for about 23% of the index and natural resources (oil, energy, basic materials) contribute about 17% of the index. Compared to these two sectors’ weighting the tech sector’s contribution is tiny at about 1%. This is in sharp contrast to the US market where the technology sector plays a major role in benchmark indices and the economy.

Stock-specific Risk:

According to an article by Jamie Black, partner & head of private clients at Sarasin & Partners in Money Observer, the 10 biggest companies listed on the London Stock Exchange represent more than one third of its total value. These 10 firms include British giants like HSBC Holdings(HSBC), British American Tobacco(BTI), BP(BP), Royal Dutch Shell-A(RDS-A), etc.

Income Risk:

Two thirds of all UK dividends is currently being paid by just 20 companies. So income risk is also significant. When banks slashed their dividends during the Global Financial Crisis(GFC), Shell and BP ended up paying an astonishing 24% of all UK dividends.

Related ETF:

  • iShares MSCI United Kingdom ETF (EWU)

Source: Are your investments stuck in a UK rut?, Money Observer

Disclosure: No Positions

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