May 15, 2018
The examples below are not an exhaustive history of periods of high index concentration and may not describe the future of the Chinese stock market, but we believe that they provide some perspective to consider.
- At the end of 1988, Japan’s weighting in the MSCI EAFE maxed out at almost 65%. As the chart below shows, the country’s return in the index for the prior decade was over 26% per year. Japanese stocks contributed most of the EAFE’s outperformance relative to the S&P 500. For the following decade through December 31, 1998, Japan’s country return in the EAFE was less than -5% per year which vastly underperformed other international markets.
- Domestically, we experienced a similar phenomenon when the “Tech Bubble” in the early 2000s resulted in the Information Technology sector of the S&P 500 becoming almost 34% of the benchmark. For the five years ending March 31, 2000, this sector had a total return of over 50%, far outstripping the second best performing sector. Like the example above, the period following these strong returns failed to reproduce outsized returns relative to the overall market. From April 1, 2000 through March 31, 2005, technology stocks dropped 18%, underperforming the broader market which registered a -3% return. Technology has provided wind to the sail of the recent bull market; however, as of March 31, 2018, it stood at 25% of this benchmark.
 The Information Technology sector, as defined by Standard & Poor’s, was 33.6% of the S&P 500 as of March 31, 2000.
 The Financial Sector, which was the next best performing sector, returned 26.5% over the same period.
 For the decade ending 03/31/2018, the MSCI China Index has gained 6% per year whereas the MSCI Emerging Markets Index has earned 3% per year.
Sources: Standard & Poor’s and MSCI
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