With property and share markets trading at all-time highs, it’s reasonable and perhaps prudent to consider whether we are in a (asset price) bubble. Bubbles cannot grow indefinitely and at some point, all bubbles burst.
Is the share market about to crash?
Share markets around the world have been incredibly resilient throughout the pandemic and almost all markets are trading above pre-pandemic levels. That probably shouldn’t come as a big surprise, as government fiscal support here and abroad has been unprecedented and interest rates couldn’t be much lower.
Rivian is a good example of a bubble
There are some very clear examples of bubble-like share market valuations. The recent listing of shares in
Rivian Automotive Inc. in the US (NASDAQ) is a perfect example. It listed on 9 November raising $US12 billion from investors. Rivan is valued at $US110 billion making it the 5th most valuable automotive manufacturer in the world, behind Volkswagen, which sells 2.8 million units (cars) per year. It’s worth almost as much as Australia’s most valuable company, CBA.
Perhaps the most noteworthy thing about Rivian is that is hasn’t manufactured one product yet. That’s right! It hasn’t generated $1 of revenue, let alone a profit. It is true that Amazon has agreed to buy 100,000 electric delivery trucks from Rivian, which are to be on the road by 2030, but it effectively hasn’t manufactured one unit. There is no conceivable way on earth that a $US110+ billion valuation could be justified for this company. It’s insane.
But not all stocks in the US are overvalued
It is true that the large US tech companies have contributed substantially to the US stock market’s returns over the past 10 years. The
FANMAG stocks now account for almost 24% of the S&P500 index. The total value of these six companies is almost $US8.5 trillion. Japan’s entire stock market is worth $US6 trillion. It is also noteworthy that Tesla’s market capitalisation (value) has added almost $US0.5 trillion to the S&P500 index since joining it in December 2020.
But some of these tech companies have been driven by sound fundamentals. Take Apple as an example. It took 38 years to reach a $US1 trillion market valuation in 2018. It only took 2 years to double its valuation to $US2 trillion (by mid-2020). It is currently worth more than $US2.6 trillion. A lot of this growth in value has been driven by underlying earnings (profit). Its trading on a PE ratio of 28 times which is not implausible. In fact, its relatively easy to justify.
It’s happening in Australia too
There are signs of bubbles in different companies in Australia too.
Cloud-based accounting software provider, Xero has a market capitalised value of $22 billion. It reported a loss of $6.5 million for the first half of the 2022 financial year. Whilst Xero likes to talk about the lifetime value of a customer, investors are (or should be) more interested in profitability, of which Xero has none.
But also, there are large Australian companies that are trading at attractive multiples. BHP, for example, is trading at a forward PE ratio of only 12 times, which is very low. That is mainly because its share price has fallen sharply over recent months in line with the price of iron ore.
Australian property price bubble?
According to Core Logic, the home value index has risen by 30% in Sydney over the 12 months to October 2021, 26% for Brisbane and almost 20% for Melbourne.
Whilst recent
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