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Thinking about the future leaders of the ASX

Taking a look at the top 10 companies on the ASX, not a lot seems to change.  We’ve got a few banks, a healthcare giant, a few miners and a couple of retailers.

So it appears not much is happening. But I think it masks an underlying trend. It’s my view that our market is slowly becoming more diversified. As an example, with the CSL Limited (ASX:CSL) share price climbing, it’s about to take over Westpac Banking Corp (ASX:WBC) as our third largest company.

With only a year or two of solid growth, CSL may become our largest listed entity. That in itself is quite a milestone, given the dominance of our banks for the last decade or two.

Then there’s a large number of rapidly growing mid-cap companies which are reinvesting back into their businesses to grow further. Many of these businesses have global operations and a large market opportunity.

I’m talking about the likes of Amcor Limited (ASX:AMC), Treasury Wine Estates Ltd (ASX:TWE), Cochlear Limited (ASX:COH), REA Group Limited (ASX:REA) and Ramsay Healthcare Limited (ASX:RHC), amongst others.

Given the limited expansion opportunities for many of our big name stalwarts, they tend to pay out most of their earnings as dividends. And that makes sense. There’s no point spending shareholders money chasing growth projects that are unlikely to prove fruitful.

So thinking logically, many of those mature businesses are unlikely to grow that much in the future. Yet a little lower down the list, many of the other top 50 companies I mentioned, are growing quite strongly. This means they’ll inevitably climb the ladder and some will become our largest corporations in the relatively near future, business performance permitting.

Another bonus – our market’s reliance on financial companies is lessening. Just looking back in 2016, financials made up around 42% of the ASX300. Today that number is around 31%. And that’s despite the market actually increasing over that time.

This means, even though the share prices of the major banks have weighed on the index over the last year or two, the market has still moved solidly higher, because of other industries and companies performing well, like resources, healthcare and many of the mid-cap growth names.

If you don’t feel comfortable with the nature of the index, that’s fair enough. But personally, I no longer think it’s as bad as many claim – actually it’s improving. This doesn’t stop us from deciding which of these future leaders to invest in.

Foolish takeaway

The most important thing to do is keep investing. Focus on the long term opportunities a company has, rather than getting caught up in one set of results, analyst expectations, or worse, daily share prices.

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Motley Fool contributor Dave Gow owns shares of Cochlear Ltd., Ramsay Health Care Limited, REA Group Limited, and Treasury Wine Estates Limited. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, REA Group Limited, and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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