Size matters: The growing risks of concentration

Size matters – in artificial intelligence (AI), markets, and weather patterns.

The following visuals aim to highlight things happening right now that may be impactful to markets and, ultimately, your investments in them. At the very least, these are fascinating, large trends.

Read:

Preparing Africa’s data centres for the demands of autonomous AI
Giant data centres get the first green light from Cape Town tribunal

The Magnificent 7 – Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, and Nvidia – have spent vast amounts of AI.

In aggregate, they have spent almost three times the quantum of our local annual economy.

Magnificent 7 AI spending vs SA nominal GDP

Source: Gemini-pulled data, with analyst workings and graphing.

The size of spend has hit almost every corner of the world, from semiconductors and raw materials to Asian markets, and yet most of these data centres are in the US.

Thus, what no one is talking about is how this AI spending has become so large that its unproven monetisation is a growing risk to the entire US economy.

A collapse in data centre spending could drag the US into a recession, and simultaneously collapse the South Korean market …

Size matters, especially where it builds growing concentration.

ADVERTISEMENT

CONTINUE READING BELOW

The JSE

A similar concentration risk that is closer to home is on our own JSE.

The following chart shows that the number of companies listed on the JSE has steadily declined for years, but the market cap of the entire market has steadily risen.

Number of JSE listings vs aggregate market cap over time

Source: Gemini-pulled data, with analyst workings and graphing.

In other words, more and more of the JSE’s ‘performance’ is being dictated by fewer and fewer, larger and larger stocks.

What if something goes really wrong with one or more of them?

ADVERTISEMENT:

CONTINUE READING BELOW

(Isn’t Tencent spending more and more on AI? What if Capitec’s unsecured loan book blows up? What if the gold price collapses? Or the platinum price? All unlikely, but none of them impossible.)

This one is a risk for index investors, but it is by no means unique to our market.

The Magnificent 7 in the first chart above currently make up about a third of the S&P 500 Index. The other 493 stocks make up only two-thirds of the same index. A decade ago, the Magnificent 7 only made up 10-12% of the same index.

El Niño

Finally, do you remember the term El Niño? Some years back, you could not glance at the news without seeing headlines about El Niño and the drought it was causing in South Africa.

Just to remind you, El Niño is a global climate phenomenon whereby the unusual warming of surface waters occurs in the eastern and central tropical Pacific Ocean.

Read:

How an El Niño becomes a super El Niño
Will El Niño drought hit food prices in South Africa?

This significant shift in ocean temperatures disrupts normal atmospheric circulation, often triggering heavy rainfall in certain regions (not ours!) while causing severe droughts in others (such as South Africa).

SA’s annual rainfall trend vsEl Niño southern oscillation phase

ADVERTISEMENT:

CONTINUE READING BELOW

Source: Gemini-pulled data, with analyst workings and graphing.

Historically, South Africa tends to be drier during El Niño periods. Importantly, the current period increasingly points to a (very) strong El Niño that is building.

So the odds of a severe drought hitting South Africa (and Australia) are steadily climbing.

This also means there is a rising risk of destructive flooding in places like Peru, Ecuador, Kenya, Somalia, southern California (how many data centres are there?), Florida (or here?), and southeastern South America.

All of the above trends are big and are playing out in real time.

All of them can materially impact your investments in a myriad of ways. And all of them are currently under-broadcast in many media sources.

* Keith McLachlan is CEO of Element Investment Managers. 

#Size #matters #growing #risks #concentration