Beware the microbubbles, expert warns

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January 27 2021
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Investors are being warned that concerns about the sharemarket being overvalued are overblown, with microbubbles posing the imminent risk to investors, an expert has stated.

The CEO of deVere Group, Nigel Green, said that despite global shares reaching an almost record highs on Monday, higher valuations should be expected.

He highlighted the large monetary and fiscal response to the COVID-19 pandemic, which has resulted in ultra low bond rates, and record-low interest rates which is leading to higher profits for businesses.

He also pointed out that institutions and retail investors with spare capital have little place to put their money, which is leading to a higher share prices.

“As stocks hit historic highs, there are fears that the boom we’re currently experiencing could end in a bust, similar to the dot-com era,” Mr Green said.

“For the time being, we believe that concerns over a large stock market bubble are overblown. To understand the reasoning, we need to look at why markets are valued so high at the moment.”

However, while highlighting a market downturn is unlikely, the investor pointed out that microbubbles of a small group of stocks that consistently rush to new highs against strong fundamentals are putting investors’ capital at risk.

“Hyper growth stocks, which often lure in do-it-yourself investors with their headline-grabbing current performance, at the moment appear to have no ceiling.

“However, highly profitable incumbents in their sectors could soon bring the ‘story stocks’ back down to earth, with their valuations headed for a meaningful correction.”

Another major risk of microbubble stocks, said the deVere boss, is that they overshadow the potential of new stocks and sectors, with investors subsequently missing key low entry point opportunities.

“There are also new businesses emerging which people, including myself, see as the future. Not all of these will succeed, of course, while some will rocket,” he noted.

“Therefore, investors should work alongside a good fund manager to seek out those stocks most likely to generate and build their wealth over the long term.

The CEO believes investors today should be more worried about the microbubble instead of a macrobubble.

“Any potential bursting of bubbles is likely to be within specific stocks, so unlikely to rock the global financial markets as has happened previously – but individual investors could still be caught off guard.

“Microbubble spotting, and diversification across asset class, sector, region and even currency, should become a priority for investors right now,” he concluded.

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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