Long memories required

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The initial public offering of Snapchat earlier this year, which valued the social media company at $29bn before ending up as a bit of a damp squib, also had a rather familiar feel to it for those with long enough memories.

Fund managers certainly seem to think that things are getting a little toppy. According to the latest Bank of America Merrill Lynch survey of institutional investors, 44pc think that equities are too expensive. This is a bigger proportion than at any time since the survey began back in 1998 and up from 37pc just last month. A further 18pc of respondents think that equity markets are “bubble like”.

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What’s more, three-quarter of investors said that they thought that tech stocks are either expensive or bubblelike. Investing in high-growth US stocks (being “long Nasdaq” in the vernacular) was top of the list of most crowded trades. And a net 84pc of respondents said that the US is the most overvalued region.

So, all these worried investors are rushing for the doors, right? After all, it is their clients’ money that’s at risk here, not theirs.

Well, according to the very same survey a net 40pc of asset managers say that they are overweight equities, which essentially means they’re making an outsized bet on the asset class. And what’s their favourite sector at the moment? You, guessed it – technology.

There are several overlapping explanations for this apparent cognitive dissonance. The first is that some investors really do believe that “it’s different this time” despite those words being about the most dangerous in finance.

The 2000s

At the turn of the millennium investors were betting on the potential of tech stocks, now the importance of the internet and its centrality to everyday life is proven.

At the end of the 1990s roughly 300 million worldwide had (fairly clunky) access to the internet; now that figure is something like ten times higher and for many it comes through the smartphone that is always on them.

Today’s big tech giants have proven business models and a long track record of churning out both revenues and profits (apart from Amazon that has only just got around to achieving the latter). This means that while their valuations are stratospheric in market capitalisation terms, they are a bit more conservative when you look at price-to-earnings ratios. Microsoft, for example, currently has a p/e of around 30 compared to around 50 at the time of the dotcom bubble (at which time Intel had a truly eye-watering p/e ratio of 190).

At the moment, the negativity is quite stock-specific. Short interest in Apple (essentially bets that the value of the shares will go down) has risen by 15pc over the past month, according to analytics company S3 Partners. For the four other FAANGs companies, it’s up just 5pc over the same period.

iPhone blues

Much of this can be traced to worries that the iPhone 8 won’t be as fast as its rivals. Apple is so big that if its shares go into reverse it can have a big effect on the whole index.

Another thing weighing on the minds of investors will be the fact that just because stocks are expensive does not necessarily mean that they can’t become even more expensive. Yes, we’re eight years into a bull market but it could extend into a ninth or tenth year. Those investors who take their money off the table too early will lose out.

And then there is another issue and it’s a biggy – the almost total lack of other appealing asset classes in which investors can park their money.

They could sell their equities and invest in cash. But that would only guarantee that it gets slowly and surely eroded by rising inflation. And if they think equities are in a bubble then fixed income assets are, after a decade of record low interest rates and quantitative easing, strapped into stratosphere-bound hot air balloons. Fund managers could just hand the money back to investors but then they wouldn’t earn any fees.

Equity investors also tend to be congenital optimists: they may think equities are overvalued, and technology stock in particular, but they remain overweight equities, and technology stocks in particular, because they back their chances of getting out ahead of the crowd when things start to turn. They can’t all be right, of course.

@mindhunter

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