Predicting a crash can be very difficult. Many of the professional investors who called the last major crashes also predicted other crashes that never eventuated. What we do know for sure, is that there are times when share prices are cheap, and times when they are expensive.
US Share prices have never been more expensive than they are now.
Conventional wisdom would therefore dictate that at some future point prices will be cheap and for that to happen, either earnings will have to skyrocket (possible, if unlikely) or prices will have to come down.
This was the sentiment presented by professional British investor Jeremy Grantham last week, when he said that the current run in US share prices “has matured into a fully-fledged epic bubble” pointing to “extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour”.
Mr Grantham admits that the timing of a bubble ending can be hard to predict. His own guesses at the end of the Japanese asset bubble of the 1980’s came two years too early. Still he has a stab at guessing that the current US asset bubble will pop midway through 2021.
What has caused prices to get to these levels?
In the past, prices have rallied strongly with perceived strength in the underlying economy. This time around, things are a bit different. The biggest driver of share price gains has and continues to be the large monetary and fiscal stimulus being delivered around the world. Given that these stimulus programs are likely to continue, some argue that the share price gains will as well.
It is also worth noting that not all stocks are trading at the same extreme value ratios that the US large cap stocks are. Domestically for example, there are plenty of large Australian stocks trading right around their longer-term value ratio averages. Still, should large-cap US stocks fall in earnest, the reverberations will be felt in every listed equity on the planet.
Mr Grantham suggests that to protect yourself from an eventual bubble burst, you should stay underweight on US high growth tech stocks, and overweight under-loved value and emerging market stocks.
What does this mean for Australian investors?
Fortunately or unfortunately, the make-up of large cap Australian shares is more of value than growth; think the banks and the miners. While our banks are historically expensive compared to their averages, this is largely due to expected strengthening in their underlying businesses in the coming years.
Many of our large-cap miners are cheap compared to their overseas peers, or even their own historical averages, so they also fit the mould of ‘value’ shares.
When trying to identify is a stock remains good value, or whether the share price is based entirely around future expected and/or speculative growth, you have to look at the numbers. Our emeraldequities.com.au platform provides this and any other data point you need. If you’d like to discuss our platform or any ASX listed stock, please contact an Emerald Advisor on 03 8080 5788.