The current bubble in a select group of technology stocks compares to the real estate bubble in Japan in the late 1980s. That’s according to Andrew Perlin, founder and Chief Investment Officer of Washington Peak, an investment advisory firm.
Perlin has written an opinion editorial in the Financial Times, the crux of which is that the current hyper-enthusiasm for anything perceived to be disruptive echoes the behaviour of investors in Japan more than 30 years ago and the ones who drove dot-com stocks to stratospheric levels in 2000.
Some froth has come out of tech stocks recently but Perlin believes that this time is not different and that the current bubble will likely not end well.
Here are some hi-lights from his article:
- Stocks with real, or perceived, exposure to the cloud, digital payments, electric vehicles, plant-based food, or anything at all to do with the stay-at-home economy have shot up meteorically.
- Bubbles are formed around individual stocks and sectors. As the concentric circles of excess widen, more and more stocks are infected.
- That is how a stock such as Tesla commands a market capitalisation of about $400 billion, up from $80 billion in March, and $40 billion one year ago.
Just as soaring price-to-book ratios signalled massive speculative risk in Japan in the late 1980s so today in the US insanely high price-to-sales ratios highlight the total lack of realism embedded in the hottest growth stocks.
- Today, according to Bloomberg data, 530 out of America’s 8,513 listed common stocks trade at more than 10 times sales. This is 6.2 per cent of all common stocks, up from a ratio of 3.8 per cent at the market’s low in March.
- Only at the very top of the dotcom bubble, in March of 2000, can we find a larger percentage of stocks (6.6 per cent) trading in excess of 10 times sales.
- In 2000, three of the top 10 US stocks by market capitalisation had price-to-sales ratios over 10 times: Cisco, Intel and Oracle.
Today, four of the top 10 US stocks have price-to-sales ratios over 10 times: Microsoft, Facebook, Tesla and Visa.
- In Japan, the market capitalization-to-gross domestic product ratio jumped to 140 per cent by the end of 1989.
- The ratio of market capitalisation-to-GDP in the US in 2000 hit a similar level.
- Today, the market capitalisation-to-GDP ratio in the US is just shy of 200 per cent.
How this ends is hard to say but with the Fed pursuing thunderous asset purchases and getting ever softer on its two per cent inflation target, the bubble is firmly on track to be one of biggest in stock market history…(and when bubbles burst) it is more often than not shocking, spectacular and disorderly.
Image source: www.thoughtco.com