As global shares came close to record highs on Monday, current fears over a large stock market bubble are overstated – it’s the micro-bubbles that may present more imminent risks to investors.
With MSCI’s All Country World index up 0.2% on the day, there are fears that the current boom could bust, akin to the dot-com era.
We think the concerns over a large stock market bubble are indeed overblown, but in order to see why, it’s important to consider why markets are valued so high now.
In essence, it’s down to the unprecedented levels of monetary and fiscal support, all-time low interest rates, ultra-low bond yields, the fact that earnings are up and that institutional and retail investors have large reserves of surplus cash.
This is indeed a rare combination and, furthermore, it can be expected to take several years for the markets to cool considerably.
The micro-bubbles of a small group of stocks that reach new highs and rebuff all balanced valuations are perhaps more worrying.
Hyper-growth stocks, which tend to attract Do-It Yourself investors, don’t appear to have a ceiling right now.
That said, highly profitable incumbents in their sectors may soon bring the so-called ‘story stocks’ back to earth with the valuations set for a meaningful correction.
Another significant risk of micro-bubble stocks is that they detract from the possibilities of new stocks and sectors. As such, investors are missing out on key low entry point opportunities.
Moreover, there are new businesses coming about which many people regard as the future. Naturally, not all will succeed, but others will skyrocket.
As a result, it’s important that investors work alongside a good fund manager to seek out the stocks with the greater likelihood of creating and building their wealth over the long-term.
In the current landscape, it’s not the macro-bubble that investors should be watchful of.
Potential bubble bursting will likely take place within specific stocks, rather than rock global financial markets as before. Nevertheless, investors could still be caught out.
Therefore, spotting micro-bubbles should become a top priority for investors now.
Nigel Green is CEO and founder of deVere Group, one of the world’s largest independent financial advisory and fintech organisations.
Photo: Stefan Powell