US vs. Foreign Equity Markets: Concentration of Top 5 Stocks 1990 to 2020

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The universe of foreign stocks available for investment is huge relative to the US market. Thousands of firms trade on a range of markets from other developed countries to emerging and frontier markets. Foreign equity markets are also less concentrated than the US markets and hence offer excellent opportunities for stock pickers. In addition, going overseas offers diversification benefits as well. I have written about concentration in the US markets before many times some of which you can find here and here and here.

Yesterday tech giant Apple(AAPL) crossed the $3.0 Trillion market cap making it the first US company ever to reach that milestone. The past few years and more specifically last year much of the gains in the S&P 500 have been concentrated in the five major firms including Apple. Last year the top five accounted for 31% of the index returns.

I came across a research whitepaper recently that discussed the case for international stocks. The following chart from the paper shows the weightage of the top 5 firms in the US market as represented by the S&P 500 index and foreign markets using the MSCI World ex-USA index from 1990 to 2020:

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Source: Six Charts That Make the Case for International Equities and Value by Daniel Woodbridge, HartfordFunds

While the top 5 in S&P 500 represents nearly a quarter of the index the top five in the international equities index denote just 7%. This shows how narrow breadth of the US markets.

Related stocks:

Disclosure: No positions

WSJ: Defense Stocks Are At Their Cheapest Valuations Now

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One of the sectors that offers steady income and growth is the defense sector. Unlike other sectors such as utilities or industrials, defense industry is unique in that much of the future business depends on the federal budget. So this creates a cloud of uncertainty over defense stocks. However the good news is usually requested funds are allocated by Congress. Last month, the House approved a bill that allocates $25 billion more than requested by President Biden according to an article in the journal.

In another article last week Jon Sindreu at the journal noted that defense stocks are at their cheapest valuations now in eight years. From the article:

Contrary to expectations, though, the political deal hasn’t rekindled investor optimism much. Having lost ground during the pandemic, military stocks are now at their cheapest valuations in eight years.

Some analysts blame sustainable-investment trends, but the bull market has been unkind to all equities insulated from economic cycles, which gain less from the pandemic reopening. Higher inflation shrinks the budget in real terms and could squeeze the margins on big programs like the F-35 fighter, which makes up 30% of Lockheed Martin’s LMT 0.52% revenues, even if history shows that cost increases are eventually passed on to customers.

Wall Street’s optimism was also dealt a blow when Lockheed, Northrop Grumman NOC 0.66% and L3Harris LHX 0.14% recently provided disappointing outlooks.

Yet investors are concerned about a deeper-seated problem, too: Defense firms may have stuck too much to their traditional role as steady dividend payers at a time when they need to accelerate investments in technology.

Source: How Silicon Valley and a New Pentagon Strategy Are Breaching the Defense Business, WSJ

The key argument of the article was the lack of focus on innovation among legacy defense companies and rising competition from non-traditional players like Amazon(AMZN), Alphabet(GOOG), General Motors(GM), Palantir (PLTR), Microsoft(MSFT), Oracle(ORCL), etc. I do not believe these companies are going to disrupt the military companies in any significant way. So investors interested in gaining exposure to the defense sector can consider adding stocks in a phased manner.

The following charts show the proposed 2022 budget:

Source: National Priorities Project

Some of the top defense stocks for further research are listed below:

  • Lockheed Martin (LMT)
  • General Dynamics (GD)
  • Boeing (BA)
  • Northrop Grumman (NOC)
  • L3Harris Technologies, Inc. (LHX)
  • Raytheon Technologies Corporation (RTX)
  • BAE Systems PLC (BAESY)
  • Ingersoll Rand Inc (IR)

Disclosure: No positions

Why Diversify Across Asset Classes: A Canadian Example

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The US equity markets have had another excellent year with the S&P 500 on track to close out 2021 with a total return of over 29%. This is the 3rd year in a row the index has shot up by double digit percentage points. It remains to be seen if the bull market will continue in 2022. With that said, it is important to not get too complacent. One of the key strategies I have repeated in this blog over the years is diversification. Investors should not put all their eggs in one basket instead diversify across many asset classes. Diversification can also include holding various assets across countries, regions, etc. The key point is not to YOLO one’s assets into some meme stocks like Gamestop(GME) or AMC(AMC) to strike it rich quickly. The meme stocks phenomenon is an aberration to say the least in the grand scheme of things.

In any given year, various asset classes perform differently as expected. For example, in 2020 emerging equities were the best based on the MSCI Emerging Markets Total Return in Canadian dollars while cash was the worst with a paltry 0.6 return. US stocks were the top performers in 5 of the 10 year period from 2011 to 2020. Canadian equities had the best return only in one year in 2016 during the same period.

The following chart shows the returns of various asset classes from 2011 to 2020 in Canadian Dollars:

 

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Note: US returns (S&P 500 Total Return Index) shown above have different figures since they are in Canadian Dollars. 

Source: RBC Global Asset Management

For an interactive version of the above chart go to the RBC site.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)
  • Vanguard Developed Markets Index Fund ETF (VEA)
  • SPDR S&P 500 ETF (SPY)
  • Vanguard Total Bond Market ETF (BND)
  • SPDR® Barclays High Yield Bond ETF (JNK)
  • iShares MSCI Canada Index Fund (EWC)

Disclosure: No positions

Covid-19 Levels Soar Across The U.S.

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The daily average for Covid-19 cases in the US reached 301,472 yesterday according to NY Times. In the past 2 weeks, it has soared by more than 153%. All previous records are getting broken in many states across the country.

Compared to other developed and even emerging countries, the vaccination rate is still low at 62%. The following awful chart from CNN below shows the community transmission of Covid-19. Pretty much the whole country is in the red category.

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Source: Omicron surge is ‘unlike anything we’ve ever seen,’ expert says, CNN

Below is all-time Covid-19 cases chart:

Source: The U.S. breaks its single-day case record, nearly doubling the highest numbers from last winter, NY Times

Canada’s Railway Profile: Infographic

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Canada is the second largest country in the world in terms of land after Russia. It is interesting to note that Canada is also slightly larger than the US. Canada’s economy is about one-tenth the size of the US economy. However one major difference between the economies is unlike the US economy, Canada is a resource-based economy. Most of the country is uninhabited but rich in natural resources like timber, gold, diamond, nickel, etc.

To move all the natural resources across vast land it is necessary to have an efficient rail network. Though the country has passenger rail systems the Canadian railway system is dominated by freight railways. This is not surprising since the vast majority of the population lives closer to the coasts and closer to the US border. So much of the resources from up north and west are transported thru railroads. Two major Class I railroads – Canadian National(CNI) and Canadian Pacific(CP) – cover the entire country with some smaller routes supported by short line networks. Both CN and CP are also publicly traded and transcontinental. In fact, the recent acquisition of Kansas City Southern(KSU) in the US by Canadian Pacific will provide CP an amazing network connecting Canada all the way to Mexico.

From an investment standpoint, CN and CP are some of the best ways to profit from not only the growth of the Canadian economy but also also the US economy since both railroads are highly interconnected with the US rail network. With that brief intro, below is an interesting infographic I recently came across at the Railcan website.

Click to enlarge

Source: Railway Association of Canada

Disclosure: Long CNI