Technology firms are playing a major role in the performance of equity indices, and it’s not just in the United States. This relationship is particularly evident in Asia, where a few dominant technology firms have helped propel equity markets to outsized returns.
The question now is how long these elevated returns will last. As risk of a modest credit event grows because of indications of fraud and lax risk management among regional banks, investors are growing skittish around the idea of over-leveraged financial institutions and companies.
It’s important to remember that low rates, liquidity and leverage are the holy trinity of new finance. Should that fragile equation reverse, the lofty valuations across the tech sector could quickly fade among a flight to safety.
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Tech reigns supreme in the U.S. and Asia…
In Japan, technology firms have a 52% share of the Nikkei index, exceeding the 40% share that tech firms have in the S&P 500 in the U.S. In South Korea, tech comprises 40% of the Korea Composite Stock Price Index.
… and investors have been rewarded …
Such a high concentration of tech firms in these markets poses a risk for investors. But, at least for now, this concentration has helped fuel notably high returns.
… especially in South Korea …
Consider South Korea. Samsung’s surging share price has attracted investors from Europe, among other places, and pushed the Kospi index to record highs. As of mid-October, the Kospi had increased by more than 50% this year, while the S&P 500 had increased by 13%.
… but it’s not happening everywhere
Not every market has had such returns, partly because other factors, like tariffs, have come into play. In the Netherlands, technology firms make up 24% of the AEX index, of which the chip manufacturer ASML plays a substantial role. But ever since tariffs were imposed this past spring, the AEX has been mostly flat, rising by only 2%. Germany’s DAX index, which has an 11% concentration in tech, has also been flat since May.
