Lonsec points to ‘uncomfortable paradox’

Mike Taylor

Managing Editor and Publisher

2 June 2026

Investors need to accommodate the reality that, for now, developed and emerging market indices are heavily influenced by a narrow set of large-cap companies, particularly within the technology sector, according to research and ratings house, Lonsec.

In an analysis issued this week, Lonsec Global Equities Manager, Hong Hon said the current global equities environment is being increasingly defined by an “uncomfortable paradox” – the performance of broad benchmarks that appear diversified on the surface but are being driven by “an ever-narrowing set of stocks, sectors and countries”.

He said this dynamic is evident across both the MSCI World and MSCI Emerging Markets indices, and poses a growing challenge for active managers, particularly those with valuation discipline.

“The result is an environment where benchmark-relative risk is rising, portfolio beta may be unintentionally drifting, and the need for more deliberate risk management is becoming paramount,” Hon writes.

“In recent years, both the MSCI World and MSCI EM indices have experienced a notable increase in concentration.

“In developed markets, the dominance of US mega cap stocks, particularly within the technology sector, has pushed benchmark weights to levels rarely seen outside periods of speculative bubbles. A handful of stocks, particularly within the ‘Magnificent Seven’ cohort, now account for a disproportionate share of the overall market capitalisation and returns, effectively skewing the opportunity set for active managers that are benchmarked to these indices.

“Emerging markets have mirrored this trend, with concentration influenced not only by top-heavy country exposures – most notably Taiwan, China and South Korea – but also by a number of stocks within the technology sector, particularly within AI-related industries. As a result, diversification benefits traditionally associated with EM investing have diminished, and idiosyncratic risks tied to specific countries and sectors have become more pronounced.

“This structural shift matters because traditional index construction approaches (i.e. market cap weighted) naturally amplify the influence of winners. As markets reward a narrow cohort of stocks, their index weights increase, further concentrating benchmark exposure and reinforcing a feedback loop,” Hon writes.

He says a key underpinning of this concentration has been the narrow breadth of earnings leadership, with earnings growth increasingly dominated by a select group of stocks and sectors – notably within technology, and by geographies – primarily the US in developed markets, and Taiwan and South Korea in Emerging Markets.

“This narrow leadership has translated directly into market returns, whereby a significant portion of benchmark performance has been driven by a small number of stocks, often those perceived as structural growth beneficiaries. In many cases, these stocks have delivered both strong earnings growth and expanding valuation multiples, compounding their impact on indices.

“The implication, however, is that market breadth has weakened. Beneath headline index gains, a large proportion of stocks have lagged or even declined. This divergence creates a disconnect between index performance and the experience of active managers, who are often more diversified and less concentrated in the dominant names,” he writes