Worlds Apart

Monday, June 26th, 2023   Categories: Correlation, Rotation, Technology, United States

US Megacaps are behaving like a separate asset class

For some time, we have been discussing with clients the possibility of dividing up the equity universe in a different way, to give us more flexibility with our regional equity allocation. To do this, we would have to split the US into two. There are many ways in which this could be done, but it is really hard (actually impossible) to come up with financial metrics or thematic approaches which would give us a consistently applicable framework, without lots of anomalies. So, we opted for a really simple definition: the top 10 stocks, from time to time, vs the rest. These typically account for just over 40% of the market capitalisation of the S&P500. We find clear evidence that this group behaves differently from the rest of the US, often having an overweight position, when the rest of the US is underweight. As far as the current situation is concerned, we suggest that the right way to fund an increased exposure to Nasdaq, FAANG or Megacaps, is not to sell European stocks, but the rest of US equities.