Gavekal Capital: The Largest Stocks Are Carrying The MSCI World Index

Thursday, September 25, 2014

The Largest Stocks Are Carrying The MSCI World Index

The 50 largest stocks in the MSCI World Index account for roughly 28% of the total market cap of the MSCI World Index. So for a market-cap weighted index such as the MSCI World, the movement of the largest 50 stocks (out of 1615 total stocks) can have an outsized effect on the performance of the index as a whole at certain times.

In US dollar terms, the MSCI World Index is up 3.32% year-to-date. Weighted by market cap, the largest 50 stocks are up 6.92% and the remaining 1465 stocks are up just 1.46% year-to-date (as of 9/23 close). As the chart below shows, market action in 2014 has been reminiscent of market action in 2012, albeit slightly less dramatic. The gray area in the chart is the performance difference between the largest 50 stocks and the smallest 1465 stocks expressed as percentage using the MSCI World Index price level as the denominator in the calculation. As you can see, we are at the largest difference between the two groups of stocks since October 2012. The gap closed in 2013 as the rest of the MSCI World Index rallied more than the largest 50 stocks.  The question facing investors now is whether or not the gap closes again because the smaller stocks rally faster than the larger stocks or if the gap closes as the largest 50 stocks fall in price?


If we want to take this analysis one step further we can look at the performance of the largest 159 stocks (accounting for 49.92% of the total market cap of the MSCI World Index) vs the smallest 1465 (accounting for 50.08% of the total market cap of the MSCI World Index). Here the dichotomy of returns is even more pronounced. In fact, the performance difference between these two groups of stocks hasn't been wider at any point in the 5+ year bull market. As you can see in the chart below, the largest 50% of stocks started outperforming at the same time as the largest 50 stocks did in 2012, however, they have held on to their gains for three straight years and have since increased their outperformance relative to the smallest 50% of stocks recently.


The last thing to note is that off the March 6th, 2009 lows, the smallest stocks in the MSCI World substantially outperformed the largest stocks. Something to keep in mind the next time there is a cyclical low in place.