Daily Brief - Is it time to rotate out of US equities?

Here’s something that will surprise you: 80% of the top equity markets in 2021 were Emerging Markets (source FT).

You are probably wondering ‘What? Didn’t EM crash in 2021?’.

Actually, no.

Chinese equities certainly did poorly in 2021 - what with crackdowns, the disappearing act of Jack Ma, Bitcoin mining being prohibited, and more. Hong Kong did even worse.

This made the MSCI EM index drop 5% through the year. Remove China/HK and the index is up 9%.

That certainly pales compared to the 22%+ performance of S&P500 - a performance disproportionately led by a Rat Pack of star Tech stocks.

This leaves us with the most concentrated US market since 1980 - the top 5 stocks represent 20% of the index and the top 10 stocks represent one third.

Can this indicator be used as a market-timing gauge? Presumably no, also because it reached a similar level in the early 80’s after what was a long equity bear (remember the famous Death of Equities cover of BusinessWeek?).

Still it bears watching. Equity markets are unavoidably mean-reverting in the long-term. There will be a year when EM outperforms DM, albeit timing the switch will not be easy.