Displaying items by tag: bubble
One of the largest asset managers in the world made a potentially very worrying claim today: that ESG today is a lot like the tech bubble was in year 2000. The sovereign wealth fund of Norway’s CEO, Nicolai Tangen, says that much like dotcom stocks, ESG asset are trading at very frothy valuations. What is interesting about his claim, though, is that he is not focused on the potential “bubble”, but rather on what those valuations mean. “What is interesting is, if you compare the situation now with, for example, the situation before the year 2000, then the stock market was right that technology companies were going to do well in the future … But the valuation went a little high, so it came down again, but the technological development continued, said Tangen. He continued, “We may see something of the same sort now, that what is happening in the green shift is extremely important and real”.
FINSUM: So Tangen is saying there is a big bubble in ESG, but in the way only an ultra-long-term investor like a sovereign wealth fund can, he is focused on how the market is “right” about its long-term potential.
There has been a lot of speculation over the last month about whether the market is in a bubble. The reason for this are numerous: the huge run up in large cap growth stocks, the meme stock frenzy and beyond. However, the answer to whether the market is in a bubble can be found in a recent study and paper by Harvard. Researchers from the university outlined what bubbles really are, and clearly show that by historical standards there is only one sector of the market currently in a bubble: the S&P 500 Technology Hardware, Storage & Peripherals index, which does include Apple. However, no other sectors, nor the S&P 500 itself could be considered to be in a bubble. In fact, it is quite rare for the market as a whole to be in a bubble. Rather, market bubbles are usually constrained to a small handful of sectors. This could be seen in what is considered to be one of the biggest of all time—the Dotcom bubble. In the late 1990s and early 2000s, tech stocks surged to extraordinary valuations, while many sectors, like value stocks, lagged. When the bubble burst, many sectors actually benefitted (like value stocks).
FINSUM: This history is quite useful for context, but as our readers know, we feel each market cycle is unique and thus historical insight can only take you so far. In this instance, we think it is important to take into consideration that bonds are yielding very little, meaning there is no good alternative to equities. We believe this situation—which is obviously created/supported by the Fed and government—will help continue to lift equities.
UBS just went on the record warning of a potential bursting bubble in equity markets. The bank’s CEO says that global coordinated central bank easing posed a threat to markets and risked inflating a bubble. “I’d be very, very careful about growing further the balance sheet of central banks”, said CEO Sergio Ermotti. He further explained that current market prices were out of sync with investor sentiment, posing a risk. However, he did say that clients were ready to buy the dips in the market, which was an encouraging sign.
FINSUM: The equity markets remind us a bit of US politics at the moment. There are a lot of people in the middle without a lot of conviction, but those on the sharper ends are driving the whole thing forward.
Barron’s has published an interesting article which argues that there are ten asset bubbles waiting to pop in markets. According to an analyst cited in the publication, further coordinated global central bank easing is likely to exacerbate these bubbles and turn a “run-of-the-mill recession into a full blown financial crisis”. The ten asset bubbles cited are in the following asset classes: US government debt, US corporate debt, US leveraged loans, European debt, Bank of Japan Balance sheet and related equity holdings, unprofitable IPOs, crypto and cannabis, growth and momentum stocks, software and cloud stocks, ETFs (especially fixed income).
FINSUM: So the whole world is in a bubble except the asset class that most people pay the most attention to—US stocks. The thing about many of these “bubbles” is that the economy is still plenty healthy to cover them (such as companies’ ability to cover interest etc).
Many investors may not be aware of it, but those with assets in the sector could be sorry. Alcohol stocks, and specifically bourbon shares, are in a bubble. Tech has stolen all the limelight, but whiskey stocks—one of America’s oldest industries—have had a great decade. Millennials have revived American whiskey makers, such as Brown-Forman and MGP Ingredients, the latter of which’s shares have jumped from $6 in 2014 to $98 in 2018! P/E ratios are at about 30x and the stocks have recently started to fall sharply. It looks like the bubble is bursting.
FINSUM: The performance of this sector is pretty amazing—doubled revenues in the last decade. That is outstanding for such an old industry. However, valuations seemed to have significantly outpaced realistic value.