Bubbles are interesting, and have an element of
mystique…till poof, they go bust.
No doubt, it’s a question of timing. The
world over, all classes of assets—be they stocks or bonds, late-stage financing
of tech firms, easy funding for companies with no obvious revenues, or real
estate—are pricey. Riskier investments are not just the result of low interest
rates but also because central banks the world over have been pumping capital
into the global economy.
With valuations allotted
to technology companies getting huge, in
came the start-up baby boomers. The tech investment scene could be described as
youth-obsessed. Apart from being extremely profitable at a quick turnaround,
these companies and their stocks are getting richer and richer. The under-four publicly
traded firms are trading at nearly nine times their sales, as per Nasdaq data.
The scenario is thus one where:
· companies
are growing at amazing speeds;
· they
are stretching their horizons beyond imagination; and
· the
winners are appearing way too soon in the market, are way ahead, and are easy
to spot.
More firms are being valued at and exiting at over $1 billion, and large sums are pouring in, from
Asia too, into private technology companies. Yet, there is increased dilution,
higher cost of entry, and changing preferences, all indicating that big
business is costlier than ever before. When it comes to venture capital
funding, investors are paying more for stakes in private tech firms than they
would for publicly traded ones. But what keeps firms going is the
ever-increasing investor pool of money.
The returns from major assets in 2015 show
that investors should have made good money in the past five years. Global stock
markets were up by nearly 50 percent, and the numbers better these in the developed
markets. Global bonds and commercial property funds too did well, at 21 and 43
percent, respectively. All these have led to the bubble talk, of the
same telltale signs of 2000!
However, the fear of history repeating more often than
desired still looms large. The latest shocker is the plunging oil prices, which
is having quite an impeding impact on the GCC economy. The GCC countries have
responded with resilience, but with the slump not showing any hope of
improvement second year in a row, evidences of economic stagnation are
surfacing. The risk of another possible economic slowdown is slowly taking firm
roots and so have the dangers posed by impulsive investments in the baby
boomers and the "next best innovation" multiplied.
Opinions are divided. However, given the ever-unstable
market conditions posing sudden threats to seemingly well-established economies,
experts are right in warning against chasing the big bubble mindlessly when it
comes to making investments, especially in disruptive innovation. Maybe this baby
bubble will take time to pose a problem, if at all,
but some prudence will definitely go a long way.