Risk Wire: The Fragile Exposure to Technology

Much has been discussed about the technology sector concentration of S&P 500. Although we find that the degree of concentration is not unusual, once certain myths about the largest companies are dispelled, the nature of exposure and corresponding end-market risks indicate a degree of fragility.
The concentration of the US stock market performance in the technology sector has been source for concern in the last few years. The variedly used FAAMG or FAANG acronym (alternating inclusion of either Microsoft or Netflix along with Facebook, Amazon, Apple and Google/Alphabet) has successfully taken its place next to the old favourites, such as BRICS or PIGS.
Much like the latter two sets of countries, the companies in question have more differences than commonalities and it is the underlying markets that drive the risk profile rather than the companies themselves: fortunes of Google and Microsoft are as aligned as the future performance of Brazil and India. Although there are common drivers, the specific risks are driven by underlying end-market exposures. In this issue of Risk Wire we attempt to zero in on the ultimate sources of risk with respect to the leading technology platforms, dispelling some myths on the way.
To be clear, this is not analysis of the technology sector investments in general. Rather, we attempt to evaluate the exposure of the market to the five leading companies and the underlying risks that exposure implies.

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