Size begets size
The stock market has always rewarded winners. But today, the winners are so large that they make up the bulk of the stock index.
The stock market tends to favor larger companies, as evidenced by the Magnificent Seven in the US making up nearly a third of the S&P 500 index. In Asia, TSMC alone accounts for more than 40 percent of the Taiwan Stock Exchange. In the Philippines, ICTSI holds a 27 percent share of the PSE Index and 44 percent of MSCI Philippines. This concentration of market power into a few large players is driven by the substantial investments these companies make in data centers, advanced chip manufacturing, and talent acquisition.
For instance, tech giants are spending over $700 billion on data centers, chips, models, and talent, while TSMC is investing $54 billion to build more advanced chip plants. These massive expenditures put smaller competitors at a disadvantage, as they lack the financial resources to match this level of spending.
Index funds contribute to this trend by buying every stock in the index according to its index weight. For the PSE Index, a P100 investment in an index fund puts P27 into ICTSI, given its 27 percent weighting. Similarly, SPY, QQQ, EWY, EWT, EWS, and EPHE primarily invest in the largest stocks within their respective markets.
As US stocks have outperformed due to their leading role in the AI revolution, the country's weight in the global index has increased. Conversely, companies whose stock prices fall behind see a decline in their market capitalization and index weight, potentially leading to their removal from the benchmark or delisting.
In the Philippines, Jollibee Foods Corp. and Ayala Land were removed from the MSCI Philippines Index due to their market values and liquidity falling below thresholds. This index-driven phenomenon has significantly reduced the representation of Philippine stocks in global indices. Average daily value turnover on the PSE has dropped from P7.7 billion to about P6 billion, indicating a less active market.
Smaller companies that fail to grow in size and maintain liquidity find it increasingly difficult to attract investment, leading to a self-reinforcing cycle where only the largest companies continue to thrive.
Written by urgent.news from Philippine Star Business's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
