So will it be the FANGs and other tech heroes which pop the stock market bubble?
The FTSE 100 is near record highs, albeit only at around about the level it was at 17 years ago. Most other global indices are at or near all time highs too. If you have backed the right stocks you’re certainly are celebrating. My own portfolio, with a very heavy weighting in AIM darling Optibiotix which has raced ahead, gives me a warm feeling every time I have a look. But how long can this last?
Perhaps the fact that I find myself looking at my portfolio more often than I used to, despite being an avowed long term buy and hold investor, is a sign of the mood music. I wonder if others are falling into the same smug complacency.
For the fact is that if one looks at, say, the FTSE 100 ex banks, or the FTSE 250 the PE ratios are just extraordinarily high for this stage of the cycle. One can justify high teens Pes or more at the bottom of the cycle when earnings have tanked but at this stage, eight or nine years into a bull market, when earnings growth this year and next will be pedestrian, is surely not justifiable.
Indeed, as a bear, I would argue that the risks to those earnings forecasts, Brexit, base rate rises, unsustainable levels of consumer debt, trade wars or indeed real wars, are pretty much all on the downside.
But as a bear I have held pretty much the same view about the overvaluation of shares for quite a while. QE and artificially low interest rates have created all sorts of asset bubbles: residential property, art, football clubs and players, sporting memorabilia. Share prices are just another example of an asset bubble.
So what will cause the bubble to burst, or at least to stop growing? Could it be a crack in some of the super tech stocks, the FANGs (Facebook, Amazon, Netflix & Google) or perhaps Tesla the loss making, debt laden supercar company run by a tweeting lunatic in Elon Musk which is somehow valued at c$50 billion? Facebook has taken a beating of late amid signs of a real slow down in growth but is still on a sky high multiple of free cashflow generated. Surely, Tesla will, at some stage, go bust and, I suspect, that when it does crash it will do so quickly and in a spectacular fashion.
If one or more of these wonder stocks crash it will wipe out some investors who have bought on margin. The psychological effect on the wider market will be profound as it forces investors to accept that they have simply been overpaying for assets they have purchased. They thought that old fashioned valuation metrics did not apply to such stocks, that “it would be different this time.” It never is. A more general acceptance of that could give the wider stockmarket a much needed reality check.
But perhaps it will be the other way round? That is to say an external shock to the market, maybe judging by FOMC minutes of this week, a more aggressive bout of US monetary tightening causes a more general market de-rate and as part of that process those stocks on the highest cashflow multiples and with the least tangible asset backing get hit the hardest and indeed, if like Tesla, they need a refinancing, they simply cannot achieve that as the market appetite for risk evaporates.
So maybe the glory stocks of the past few years will be the chicken or maybe they will be the egg. Who knows? But in a correction that must surely come, they will offer up some almighty fireworks.
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