Warning – This is not a bubble
The easiest call to make in 2021 is that the market is overvalued, or for those preferring hyperbole, suggest that everything is in a ‘bubble’. Whilst there is no doubt some assets and stocks that are trading well above their fair value, to suggest that everything is overvalued may well be a stretch.
It’s an easy case to make given the Dow Jones, S&P500 and ASX200, until this week at least, were trading at or near all-time highs. The backward-looking price to earnings ratio looks excessive by historical comparisons. Yet this measure given little insight into the unique and evolving conditions we now operate in. Interest rates have remained at or near all-time lows for many years now and on a relative valuation basis most assets are actually fairly valued.
So how does one adjust their approach in an environment where everyone is calling the top? Cathie Wood, the celebrity founder of innovative and technology driven ARK Investment offers a counterpoint to the ‘run for the hills’ view point. Speaking in a recent interview she says “when I see such negative sentiment out there, especially when it comes to valuation and longer time horizons, investment time horizons, I actually feel a little more comfortable”.
“I like bad news” she shares, reiterating that “I don’t think we’re in a bubble which is what I think many bears think we are.”
This is quite a contrarian call in an investment environment that is either obsessed with the threat of inflation and the impact of higher rates, or deeply concerned about the economic impact of the growing Delta variant outbreak. ARK’s own funds have been the target of high profile shorting attacks solely on the basis of valuations.
In an effort to explain her position Wood harks back to her time investing in the Dot Com boom and bubble, noting “in a bubble…and I remember the late ’90s…our strategies would have been cheered on”
“You remember the leapfrogging of analysts making estimates one higher than the other, price targets one higher than the other” she says almost happily accepting the pessimism that faces her highly popular strategies.
So why is Wood so confident we are not in a bubble? It comes down to several things, but particularly ARK’s firmwide focus on investing for the very long-term. She cites the fact that each of the five core themes her strategies focus all their research on are still in their infancy.
These key themes including DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology, which she says are “barely off the ground”. With many of today’s investors burned by the events of the Dot Com bust, she cites ‘muscle memory’ as a key reason behind their inability to understand the events that are occurring.
Each of these themes is experiencing an S-Curve of growth, which is actually supporting the S-Curves on the other themes noting “I don’t think the market is ready for this”.
On a more macroeconomic level, Wood highlights that deflationary rather than inflationary forces are growing in the economy, which may represent a far greater risk than many appreciate. A lower cost of goods and higher productivity is clearly a positive for the consumer, but not for businesses that are thinking too short-term.
She concludes by highlighting that many companies are bowing to short-term investors, demanding profits and dividends now, rather than looking for long-term opportunities. “They are going to be stuck with obsolete products, and yet in the meantime, they’ve leveraged up their balance sheets to buyback sales and satisfy short term oriented shareholders,” she says.