/ world today news/ A new bubble is inflating in the USA – shares of companies are worth much more than they actually earn. If it bursts, the whole world market will suffer, especially Russia. A legendary billionaire investor expects this to happen not in years, but in months or even weeks. What are the risks of another stock market crash and the likely consequences?
The US stock market blew a bubble unlike any before, said legendary billionaire investor (with $160 billion) Jeremy Grantham. However, this bubble will burst just like the others. What’s more, he believes it will happen much sooner than many think. “I see crazy stories everywhere, and these are the stories that are needed to burst the bubble,” noted the expert. For example, he pointed to the surge in popularity of investment vehicles like SPACs that offer, “Give me your money and trust me to do something good.”
SPACs are specialized M&A companies that have emerged as a new way to raise capital for investors and an alternative to IPOs for some startups. “It’s a testament to the speculative nature of the market,” says the legendary investor, who has successfully avoided most bubbles throughout his career. According to him, all stocks are overvalued and in the coming weeks or months the reality will shine through.
A few weeks ago, Goldman Sachs warned of the risks of a “significant” decline in the stock market ahead of the US presidential election. Such risks are created by political and economic uncertainty, said Abby Joseph Cohen, senior investment strategist at the bank. The expert points to the uneven recovery of the US stock market after the spring crash. In particular, it is driven by a handful of tech supergiants, while other stocks have shown much weaker performance. This makes the stock market more vulnerable to potential disappointments. The growth of the US stock market is truly unprecedented in both scale and speed. Moreover, this is the first time in history and it is happening against the background of obvious economic problems.
“The S&P500, the broad US stock market index, is above year-to-date levels and even surpassing pre-pandemic highs. That is, companies are now more expensive than at the peak of the long-term bull market, when unemployment was the lowest in half a century and company profits were constantly growing,” said Alexander Kuptsikevich, lead analyst at FxPro.
“The PE ratio speaks of a stock market bubble – companies are more expensive relative to how much they’re earning. When the market goes down, everyone goes down, including the giants. We saw a similar situation in March when stock markets, cryptocurrencies, gold fell. Everything except the dollar,” says Alexey Kirienko, managing partner of Exante.
Against the background of the pandemic and the closure, the quotations of a number of companies, especially the technological ones, jumped. However, this does not reverse the decline in revenues and profits. “As a result, stock price-to-earnings performance has risen to levels well above historical averages in times that are recognized as ‘bubbles.’ The current situation is often described as a K-shaped recovery. Some sectors and stocks are increasing rapidly (for example, high-tech). Others, on the contrary, have returned to the bottom of the crisis. These are the giants of raw materials, air carriers and so on. “, says Kuptsikevich.
And, of course, there are risks that the bubble will start to burst. Americans began to actively spend their savings to buy stocks that had fallen in price in the hope of earning additional money for their growth. In addition, in the US, governments generously write support checks, allocating $ 1,200 for each adult and giving additional payments to those who have lost their jobs, so that in the end these payments exceed wages, the expert notes. Now, however, demand for stocks has waned — companies’ earnings are falling and their stock values appear inflated. It also adds to fears that the pandemic could flare up again, even to the point of shutting down economies again. Then you’ll have to forget about the K-shaped recovery and tune in for a second downtrend in stocks and the economy, Kuptsikevich believes.
However, it should be understood that balloons are popped in two ways. “It could be a sharp crack, like the one we saw this spring or at the height of the global financial crisis, when global deleveraging caused a collapse in all assets, regardless of credit quality and long-term outlook.” Another way is to gently inflate the balloon. This happened after the dot-com crisis. For three years, the major indexes have been declining, and the Nasdaq has fared worse than the others. From 1995 to 2000, its growth drove the stock up, and from 2000 to 2003, it fell. An analogy is suggested precisely with this time. An important common feature (in addition to the buzz around online companies and services) is the rich public interest in the stock market,” says Alexander Kuptsikevich.
Mihail Stepanyan, senior analyst at Freedom Finance, does not see a bubble in the US stock market. However, he sees problems in the technology sector. It is clear that in the context of the pandemic, technology companies have become even more in demand, their margins have grown, and the digitalization of life and economies will only gain momentum.
“Despite the fact that we do not see a bubble in the market as a whole, some sub-segments of the IT market seem overheated: e-commerce, video conferencing, cloud services, artificial intelligence. We believe that as economic activity recovers, the risks associated with the coronavirus will decrease and one or more vaccines against COVID-19 will be released. Then investors will move to sectors that have shown the worst dynamics in 2020, such as energy and finance,” says Mihail Stepanyan.
Overheated companies in the IT sector may come under pressure for several quarters in the future, he said. In general, however, the expert still does not expect large-scale sales, since, firstly, he does not consider the valuations of the S & P500 index to be exaggerated, and secondly, the IT sector will remain a key beneficiary of the current technological trends, which will support the growth of the financial indicators of companies in the sector. …
In any case, the collapse of the American market is a problem for the world markets, which consider the US as a wind indicator, Kuptsikevich points out. Unfortunately, this will hit Russia hard.
“The fall in world markets will hit the ruble and it may suffer even more than others. In all of modern history, she never once felt good when things were bad in the world. Moreover, social stratification increases during crises as workers lose their jobs. In such moments, social and political tensions intensify,” warns the expert.
Experience shows that during the collapse of world markets, the Russian market and economy often suffer more seriously. However, the pace of their recovery may be faster and stronger than many think. Because the economy is driven by government spending, and this makes the issue of the price of fuels and metals for rich infrastructure projects less fundamental, “Kuptsikevich believes. Therefore, his forecast for the ruble seems more optimistic: despite the possible tremors of the ruble in the coming weeks, it will manage to stay close to 70 to the dollar next year, the expert said.
Translation: V. Sergeev
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