Be wary of another pricing bubble

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November 07 2019
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Today’s investors have faced “the recession we had to have”, the dotcom boom and the subprime mortgage default in 2008. Are we now on the cusp of the next bubble?

According to MFS’ portfolio manager and global investment strategist, Robert Almeida jnr, the world is currently facing a bubble caused by investors after short-term profits as opposed to long-term goals.

Why the shift?

With central banks attempting to push risk spectrums through quantitative easing (QE) or encouraging new money to buy assets, markets have not reacted as these central banks expected them to.

“The hope was that capital would make its way into the hands of producers who’d then invest in labour, production and economically accretive activities,” Mr Almeida said.

Instead, due to management compensation structures aligning with stock performances, managers of companies have been putting short-term performance ahead of long-term objectives.

“As a result, balance sheets were levered, dividends increased, M&A (mergers and acquisitions) and buyback of shares skyrocketed,” the manager said.

Long-term implications

In the wake of the technology bubble, earnings per share fell in excess of 30 per cent while during the GFC earnings fell by 55 per cent.

Financial markets are not a science, Mr Almeida was quick to point out, and he queried how companies which have underinvested in their core business function will fare when the “artificial margin tailwinds of financial wizardry caused by QE subside”.

What should investors do?

Long-term companies with outsized leveraged and easily substituted products are at risk when markets eventually draw back, Mr Almeida said.

During a downturn, he advised investors to look to “companies whose products or services are unique and who focus on the long term”, as he believes they should “do just fine – thanks to sustainable cash flows”.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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