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Mega caps; mega valuations

Updated: Feb 13, 2023

Based on close of trade data for 10 September 2021, the largest company in the world is Apple with a market capitalization of $US2.46T. This is larger than the market cap of the ASX 200 ($US1.91T), Hang Seng Index ($USUS1.71T), Taiwan Taiex Index ($US1.92T), and Kospi 200 Index ($US1.86T); and it dwarfs the market cap of the Straits Times Index ($US0.38T).

Apple’s market cap also equates to over $US315 for every person in the world.

Apple has grown to its monolithic size because it has relatively high margins and has monopolistic pricing power with its app store. Typically, this level of dominance leads to antitrust restrictions, much like occurred with Microsoft in the 2000s. Based on recent developments in both the United States and Europe where its app store policies are being challenged, it also looks likely that Apple will have to change its business practices.

Next, we broaden our universe to the top 5 companies in the world with a free float greater than 15%: Apple, Microsoft, Alphabet, Amazon, and Facebook. In aggregate, these companies have a market capitalization of $US9.40T. All these companies are American and listed in the United States. Historically, this hasn’t always been the case. In early 2008, a Russian company even made it into the top 5 (Gazprom). And in early 2010, the largest company in the world was Chinese (PetroChina). In the following year, only two US companies made it into the top 5 (ExxonMobil and Apple).

Going back further, in the late 1980s, the top 4 companies by market capitalization were Japanese and only one American company (Exxon) made it into the top 5. Incredibly, the market cap of the top 5 US companies is now more than double the total market cap of the 2,000+ constituent Topix index ($US4.20T).

The following chart provide some additional historical context. It shows the total market capitalization of the top 5 companies relative to global GDP. From 2006 until 2018, the percentage varied between 2% and 4%. Last year this percentage spiked to almost 10%. With further increases in the market capitalization of these stocks, the percentage would have passed this threshold (the exact percentage is unknown given the lag in calculating global GDP).

Chart 1: Top 5 Market Cap relative to Global GDP

Source: The World Bank, Bloomberg

If we extend the universe, the sixth company on the list of largest companies by market capitalization is Tesla. It’s absurd for an automobile company with less than 1% market share to command such an extreme valuation.

Focusing on a broader selection of US stocks, the following chart shows the total market cap of the Wiltshire 5000 relative to US GDP.

Chart 2: US Market Cap relative to GDP

Source: (September 9, 2021)

This is a commonly used measure of stock market value, made popular by Warren Buffett's remark in a 2001 Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment". Based on this metric, US equities are deep into bubble territory.

So how is this relevant? First, it demonstrates the risks posed by having too much market beta. A market neutral fund looks particularly attractive at the moment, especially given bond prices are also at all-time highs.

Second, it provides more context to support the Fund’s net country positioning. In our research note, A Deep Dive into Chinese Equities Exposure, we highlighted the extreme relative valuation differences between Chinese and US Equities. The statistics and charts in this research note also highlight how expensive US equities are in an historical context, as well as the extreme market capitalizations of the large cap companies which dominate the US market indices. These observations, combined with the challenges of getting short exposure via individual stock positions in the current market environment, underpin our view that it appropriate to get some short exposure via S&P 500 and Nasdaq futures contracts.

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