The Australian sharemarket is experiencing a notable surge in concentration, with seven of the ten largest stocks on the S&P/ASX 200 now comprising mining or banking companies. This narrowing of market breadth has left investors more exposed to sector-specific risks than at any point over the past two decades. The shift is occurring rapidly, with the top ten companies accounting for almost 50 per cent of the benchmark’s value, an increase from 44 per cent in 2019, according to Sebastian Mullins, head of multi-asset investing at Schroders. Cameron McCormack, a senior portfolio manager at VanEck, noted this marks one of the most concentrated top ten in approximately 25 years.
The market’s lopsided nature over the past year is attributed to strong commodity prices, influenced by conflict in the Middle East, which have bolstered major commodities players, while banks have served as a safe haven for investors. Conversely, health and technology companies have seen a decline in value. Biotech giant CSL, for instance, has fallen from the third-largest to the eighth-largest stock on the ASX. It remains one of only three companies, alongside retailing and industrials conglomerate Wesfarmers and property developer Goodman, among the top ten that are not in the banking or mining sectors. While this trend is not exclusive to Australia, the country’s bourse is near the forefront, with the UK’s top ten stocks accounting for 54 per cent, compared to 37 per cent in the United States.
For the average Australian worker with a superannuation account or share portfolio, this concentration means their retirement savings growth is increasingly tied to a small number of stocks, predominantly the four largest banks and major miners like BHP and Rio Tinto. Although these companies have historically offered strong dividends and steady growth, such a heavy weighting introduces oversized risks in the event of a significant downturn in either the banking or mining sectors. Lochlan Halloway, a strategist at Morningstar, explained that investing in banks largely bets on the Australian home loan and property market, while mining exposure is predominantly to iron ore and increasingly copper, limiting diversification.
To mitigate these risks, brokers suggest investors consider “equal weight” strategies, which cap the influence of mega-sized companies and offer broader sector diversification into industrials or consumer names. Alternatively, allocating a portion of a portfolio to small and mid-sized stocks can capture the “size premium,” where smaller companies historically outperform larger ones over time. Halloway also recommends looking overseas, given the Australian sharemarket constitutes only about two per cent of the global total, to avoid having the vast majority of wealth tied to the local bourse, especially when bank share prices appear overvalued.
