If the bullish scenario plays out this week, flows are likely to be tilted more so to North America ...
Beware the Next Big Bubble
03/22/2010 5:35 pm EST
You’ve been warned about the next bubble. (Don’t panic yet. It looks like it's a way off.)
A recent survey of 109 institutional investors based in Asia and Europe, commissioned by Fidelity from the Economist Intelligence Unit, shows that 63% of respondents plan to increase their allocation to stocks in Asia (excluding Australia and Japan) in 2010 even though 1) They think Asian assets are riskier than their counterparts in developed markets, and 2) They admit that they lack knowledge and expertise in these markets.
In other words they’re jumping on the bandwagon. (I doubt that the survey would find very different results for US institutional investors. Fidelity itself, for example, is moving one of its stars, Anthony Bolton, to Hong Kong this month to set up a $971 million China investment trust that will be listed in London.)
I think we all know the effects of this enthusiasm. More money comes in, prices and (multiples) go higher, and as more money comes in, prices get pushed higher. At some point, however, prices lose all connection with the real value of the assets (a house is a house and not a poker chip). The bubble continues to inflate until some event pricks it.
The problem is that if this is a bubble in the making, what do you do about it?
It’s too early to shun Asian markets. Valuations are still reasonable, and there’s lots of money to be made in the early stages of what may turn out to be a bubble down the road.
But at some point, valuations won’t be reasonable. In fact, investors will use increasingly tortured logic to defend them.
That’s the point to move to the sidelines.
We’ll see if we’re any better at telling when to move to the sidelines than we were in the last two bubbles.
And then, of course, there’s the very real possibility that Asian markets won’t get to the full-fledged bubble stage because China will make a mistake with economic or monetary policy as it tries to keep growing at near 10% a year without setting off inflation. A mistake in China before the bubble is fully inflated would produce the kind of big correction that dampens enthusiasm about any market. (For how the world’s richest country could actually be broke, see this recent post.)
And that would be sure to send institutional investors’ plans into reverse.
A correction wouldn’t be pleasant, but it sure would beat living through another burst investment bubble.Full disclosure: I don’t own shares in any company mentioned in this post.
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