Are stocks in a bubble which may be about to pop?
Are stocks in a bubble which may be about to pop?
Who knows.
There certainly seems to be a degree of irrational exuberance in some pockets of the equity market, but as Keynes has famously observed markets can stay irrational for longer than one can stay solvent. Most importantly, the variables we need to know to solve the bubble equation (inflation, interest rates, liquidity, productivity, geopolitics, etc) are too many and mostly imponderable.
However, while we can’t predict we can certainly be prepared.
And the way to be prepared is and has always been to hold a properly diversified portfolio – in terms of investment style, industry, market cap size, number of holdings and geographical and currency exposure.
Investors are currently overexposed to seemingly expensive and overcrowded momentum strategies, paying arguably excessive premia for a very small fraction of mainly big-cap stocks within über-concentrated portfolios.
Niche AM funds provide investors with a much-needed, prudent counterbalance, through highly liquid and diversified portfolios of value stocks, many of which are found among neglected sectors and overlooked geographies.
Value stocks have rarely been as cheap and as attractive in terms of financial strength, earnings prospects and sector breadth as today. The style should benefit going forward from the boost to global economic growth which could come from two likely and massive secular trends, i.e. energy transition and deglobalisation.
True, valuation has seldom been a strong predictor of short-term stock performance (as the near term is often dominated by the “noise” of news-flow, fads and emotions), but it seems to be a strong predictor for the longer-term, explaining on some estimates about 80% of 10-year stock returns.
While history doesn’t repeat itself, it does often rhyme and perhaps it is worth remembering that in the 10 years after the burst of the 2000 tech-bubble, value strategies have significantly outperformed.
To sum up, and paraphrasing Buffett, you can’t predict a bubble or a bubble bursting, but you can make sure you are not caught swimming naked when the tide goes out.
This is a marketing communication for institutional investors. Please refer to Fund Prospectuses & KIDs before making any investment decision.
For any questions email us on: info@nicheam.com
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