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“Diversification is the only free lunch” in investing is a quote attributed to the late US Nobel Prize-winning economist Harry Markowitz.[1]

Perhaps best known for his work on modern portfolio theory, Markowitz emphasized the importance of diversifying portfolios to reduce risk and enhance returns.

Today, equity investors must explore diversification opportunities amid concerns over US political unpredictability, market concentration, and overexposure to US technology companies.

We believe it is time for greater diversification.

With market concentration in the US becoming increasingly pronounced over the past decade (Chart 1), we believe it is time for greater diversification.

Chart 1. Weight of US equities in global indices (2010–2025)

The following are three ways in which we believe investors can diversify their portfolios:

Diversification by region

Global de-risking in 2024 led to a drop in investors' allocations to emerging markets, averaging 4.8% in early 2025, down from 7.9% in 2017.1 In today's uncertain world, Asia is becoming more attractive as a place to invest.

India

Indian stocks began 2025 with a much-needed pullback that started last September. This has helped to lower relative valuations to more reasonable levels. While earnings growth has slowed, we expect this market to continue generating comfortable double-digit earnings growth going forward.

From a technical perspective, foreign investors are underweighted after six consecutive months of net selling, even as domestic investors remain net buyers.

Furthermore, India’s long-term structural growth story is intact, and we still see opportunities for companies to benefit from increased consumption, a recovery in domestic activity, and the government’s initiatives to enhance tourism.

China

Investors may also be wondering whether it’s time for an investment in China again. For years, investor and consumer confidence in China suffered following a government crackdown on property lending and sanctions on China’s tech champions.

Despite this, China managed to surprise investors with the disclosure of innovations in generative artificial intelligence (AI) (DeepSeek), autonomous driving (God’s Eye), and five-minute electric vehicle charging – all achieved despite US sanctions and other restrictions.

Valuations remain attractive despite a rally this year. For investors sitting on the sidelines, now may be an appropriate time to explore opportunities. Investors can choose single-country solutions or take a broader investment approach.

Southeast Asia

Some of the principal members of the 10-country Association of Southeast Asian Nations (ASEAN) trade bloc have, so far, been key beneficiaries of nearshoring – relocating business processes or production to a nearby country for cost, efficiency, or security reasons.

Foreign direct investment (FDI) in these countries has increased to offset a corresponding decline in investments into China (Chart 2).

Chart 2. ASEAN FDI vs. China FDI, 2004–2025 (% of GDP)

With the region receiving some harsh tariff treatment on Liberation Day, investors' concerns will naturally grow about the future trajectory of these flows.

However, despite this unexpected development, these countries typically benefit from positive demographic trends and an expanding middle class. Additionally, markets such as Vietnam and Thailand are progressing in reforming their capital markets and enhancing corporate governance.

Diversification by size

It has been well documented how a handful of the biggest companies have driven returns in developed markets with just eight stocks responsible for the majority of global large-cap returns in 2024.

But smaller companies' sheer number and diversity mean it’s impossible for a handful of names – no matter how well they perform – to drive an entire index comprising companies with smaller capitalization, or small caps (Chart 3).

Chart 3. Top 100 performing stocks, large cap vs. small cap

This diversity makes small-caps an ideal area to invest for those looking for funds with a high active share – a measure of how much a portfolio's holdings differ from its benchmark index – and lower correlation to large caps.

Adding smaller companies to a portfolio is typically seen as adding risk. However, we believe that in the current market environment, investors need to add uncorrelated stocks to ensure they are taking advantage of diversification opportunities.

Diversification by theme

AI and tech have dominated market sentiment for some time. At one point, the weighting of the Magnificent Seven (Mag 7) companies in global indices was greater than the combined weight of companies representing the next seven nations (Chart 4).

Chart 4. Magnificent Seven vs. rest of the world, MSCI All-Country weighting (%)

Against this backdrop, we believe there is a strong case for investors to seek to actively diversify their exposure to different themes.

Final thoughts

We believe diversification remains a crucial strategy for equity investors seeking to mitigate risks and enhance returns. By diversifying across regions, investors can capitalize on opportunities in emerging markets like India and China, which offer promising growth prospects despite global uncertainties. Diversifying by size allows investors to benefit from the unique strengths of small-cap stocks, which often provide higher active share and lower correlation to large-cap stocks. Additionally, thematic diversification taps into long-term structural trends and geopolitical developments, ensuring a balanced and resilient portfolio. Finally, embracing diversification across these dimensions is essential for navigating market concentration and political unpredictability, offering a unique advantage in investing. Bon appétit!

1 "Diversification Is the Only Free Lunch." Forbes, October 2019. https://books.forbes.com/author-articles/diversification-is-the-only-free-lunch/.
2 ERFP, JPMorgan Consensus Asset Allocation, March 2025.

Important information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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