Mark Mobius, the veteran emerging markets investor, has warned a bubble is forming in certain parts of the global financial market, driven in part by the continued frenzy around cryptocurrencies and investors piling into non-profitable companies.
“We are in a bubble in some areas of the market, particularly in the opaque cryptocurrency market and in some companies that are popular for one reason or the other, even though there are continuing earnings losses,” Mobius told Financial News.
“But that does not mean the investors should retreat from equity investments because investments in solid companies with a proven record of earnings growth and strong balance sheets will continue to do well in the long term.”
According to Mobius, “faulty central bank policies” have led to interest rates being “distorted to be unrealistically low”, which has encouraged investors to pursue other sources of return.
“This has led to a retreat from bank deposits which do not offer a reasonable return to more speculative investments,” he said.
“So we now have tremendous speculation in cryptocurrencies and in companies who are not producing profits but only the hope of profits.”
Mobius is not the only one concerned about bubbles.
China’s chief banking regulator, Guo Shuqing, said earlier this week he was concerned that financial markets in Europe, the US and other developed countries were trading at high levels which “runs counter to the real economy.”
“We are really afraid the bubble for foreign financial assets will burst someday,” he told reporters in Beijing on 2 March.
The growing concerns come amid sky-high valuations for some listed companies, including US technology stocks which have continued to gain value since the onset of the Covid pandemic last year. At the same time investors continue to pile into bitcoin, which so far this year has climbed 55% in value. The cryptocurrency notched up gains of more than 400% in 2020.
Other investors are also alert to bubbles forming in certain parts of the market.
Jeremy Podger, a portfolio manager at Fidelity International, pointed to the record number of Google searches for “stock market bubble” in recent weeks, a sign that investors are beginning to grow nervous.
“Maybe that is because, thanks to lockdowns, there are a lot more people at home showing an interest in the stock market. In any case, it looks to us as if there are a number of smaller bubbles rather than one big one,” said Podger.
Podger pointed to the rising number of poor quality stocks, after the number of names included in a Goldman Sachs index of unprofitable US listed companies trebled in the past year.
“The great performers here promise very rapid revenue growth and eventual profits. Some will go on to be great successes, but in aggregate the valuation of these stocks has become hard to justify,” he said.
However, Podger said any “excesses” in pockets of the market can be self-correcting.
“IPOs will float at prices that give little immediate upside, and seasoned new issues will see more stock supply (particularly from employees and private equity backers) to meet demand,” he said.
“The same is true of unprofitable companies – in 2000 there were too many of them and investors stopped believing they could all be winners.”
Laith Khalaf, a financial analyst at investment platform AJ Bell, added: “There are definite signs of bubbly behaviour, and valuations in the US do give cause for concern.
“But as the world emerges from lockdown, economies are going to expand, probably quite rapidly as a result of all the government and central bank cash that has been thrown at them.”
He added: “That should be positive for share prices, and while markets have climbed an awfully long way in the last year, I can see them continuing to motor for some time to come.
“But we shouldn’t be complacent about the risks, which is why I think drip feeding money into the market gradually is the right call right now.”
To contact the author of this story with feedback or news, email David Ricketts