Wednesday, 10 February 2016

Will this bubbly fly or fizzle? An investors perspective



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.