One of Platinum Asset Management Ltd’s (ASX: PTM) leading fund managers has said that the share market may be in a bubble.
The co-chief investment officer of Platinum, Andrew Clifford said in his part of the presentation that many growth shares are in a bubble.
Why does Platinum think the share market is in a bubble?
There were a few different points that Mr Clifford pointed to. One of the things that he identified was that there has been a high level of initial public offerings (IPOs), much stronger than previous years. He also said there was further strength of those IPOs on the first day of trading as investors sought to buy shares.
Another thing that he pointed to was the high level of retail investor interest in shares like GameStop – I’ll leave it up to you to decide whether the high level of investor action surrounding GameStop is good or bad.
The next problem he highlighted was the special purpose acquisition company (SPAC) trend where people give money to a fund to try to buy promising businesses and get onto the share market.
The valuations is the key to the bubble comment
He’s not saying that FAANGs are overvalued, but actually the tech shares that are priced at 20 times, 30 times or even 40 times the revenue. Typically, these businesses aren’t making profits. He namechecked Tesla and Afterpay Ltd (ASX: APT) as shares that fit that extreme valuation description.
Mr Clifford acknowledged that plenty of these businesses are doing well at what they do, it’s just that the share prices are seemingly pricing in extraordinarily levels of growth.
He said that this bubble is much worse than the tech bubble two decades ago.
How will the bubble pop?
The leading Platinum fund manager indicated that the economic recovery will play a big part in letting air out of the bubble. The return to growth and normal conditions after COVID-19 subsides will lead to rising bond yields – which we’re already seeing. It won’t need the Fed or the RBA to officially raise rates, the interest rates will raise with 10-year government bonds. There’s nothing to be concerned about – rates are going up because growth rates are strong.
However, these higher rates will mean lower valuations for stocks and could be most concerning for businesses that have very high valuations. Inflation could also cause a factor in the future. Higher levels of debt could also lead to higher interest rates.
But on the positive side, he said that where profits rise at businesses with fair valuations, it should lead to growth of the share price for some businesses.
