INVESTMENT STRATEGIES ASSET CLASS BUBBLES
SUMMARY
Infrastructure spending in
China concerns some, while
others see a bubble in Chinese
property prices.
Emerging markets do not
appeared overvalued from a
top down perspective but fund
managers are finding it much
harder to find good stocks
from the bottom up.
The volatile nature of
commodities, such as oil
and precious metals, means
they will always come under
scrutiny from those looking
for the next bubble.
BY GARY SHEPHERD
French critic Nicolas
Boileau-Despréaux got it
right when he said “however
big the fool, there
is always a bigger fool to
admire him”.
From an investor’s point
of view, it is the ‘greater
fool’ theory that bears this
truth – when one makes
a questionable investment
with the assumption that
they will be able to sell
it on later to someone
even more inept. It is this
practice that drives asset
class bubbles and one that
can lead to spectacular
losses, as those who were
burnt by the bursting of
the tech bubble of 2001
or the resources boom of
2007 will testify.
But is now the time to
Who’s fooling who?
Market crashes are often caused by asset class bubbles
but have we learned the lessons of overvaluation, and
can investors tell a bubble from an out-of-line price?
be worrying again about
asset class bubbles? Harvard
professor Kenneth Rogoff,
a renowned expert on the
subject, suggested so in
a piece in the Financial
Times in April.
“Even as the global markets
trend up, it is not so
hard to guess where bubbles
might be lurking,” he
warned.
l Brewing bubbles
Exceptional
Value.
So where are the potential
bubbles? The emerging
markets, particularly China,
could be a prime candidate,
especially given the
attention they have attracted
in the past two years.
Colin McLean, managing
director at SVM Asset
Management, believes
Chinese infrastructure
spending looks similar to
the early stages of the US
sub-prime crisis with investors
needing to pay close
attention to any news of
banking losses emerging
from land speculation.
“With fresh memories of
the recent banking crash,
few investors are giving
much thought to the risk
of a bubble,” he says.
“This could come sooner
than expected and China
seems the likely source. Its
recent rapid growth looks
unsustainable and some of
the lending practices there
should trigger alarm bells.
“Much of Chinese
spending on infrastructure
has been financed
through special local government
funding vehicles
that have found it easy to
borrow while interest rates
are low. Some of the biggest
cities in China have
taken on enormous debt
that is risky despite China’s
high growth rate. Given
the confidence in steadily
rising property prices, little
thought has been given to
capital repayment.”
l Property problems
William Calvert, manager
of the Axa Framlington
Emerging Markets Fund,
is also concerned about
escalating property and
land prices.
He remarks: “We have
had a YUAN4trn (£379.95bn)
We believe costs count. Which is why the Annual
Management Charges (AMC) for our funds – ranging from
0.15% to 0.55% – are among the lowest in their class.
And, as we pay all running costs out of our AMC, we expect
our Total Expense Ratio (TER) to be the same as our AMC, so
investors know the exact cost to their investment. It’s just one
of the ways we provide value to your clients.
Exceptional Value. It’s the Vanguard Way. ™
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