The UK stock market is becoming increasingly concentrated, with analysts warning that this could lead to heightened volatility and risks. The Financial Conduct Authority (FCA) chief executive, Nikhil Rathi, highlighted that just 10 firms represent nearly 50% of the FTSE 100's value, raising concerns about market stability.
Investment research analyst Michael Born noted that actively managed funds have struggled to outperform top-heavy indexes, as they often lack sufficient exposure to the largest stocks. This concentration poses a risk to diversification and can lead to herding behavior among investors.
Moreover, the concentration of dividends is also notable, with only 10 FTSE 100 companies expected to account for 55% of dividends in 2024. The FCA's '5/10/40' rule, which limits concentration in funds, has been a point of contention, with fund managers arguing it restricts their ability to deliver returns.
Rathi warned that even small disruptions could ripple across various markets, including equities and commodities, emphasizing the need for vigilance regarding systemic risks. The FCA is currently investigating the recent market dip triggered by poor US economic data to assess any new risks that may need addressing.