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Hubble bubble

Bubbles can be described as situations where the price of an asset exceeds its actual value. When these assumptions are realised to be unattainable, the market suddenly falls back. Mini bubbles occur everyday in capital markets. The bubbles we are talking about here are far more menacing, involving a level of mispricing that could undermine a whole economy and cause enormous loss of wealth.

When we look back at history, the bubbles seem obvious and sometimes ludicrous. We believe that we would never have been so foolish to have participated in such ventures. Thus, the rationale behind bubbles seems to lie in human or social behaviour.

During the technology bubble in 1999, the high prices of some stocks were being widely ridiculed but people still kept buying. Why? Investors often find reassurance in a sector that is doing well. They fear not being part of the new wealth being created.

The answer seems to lie in a long-term investment horizon, with a combination of specialists investing in high-quality instruments. A skilled multi-manager continually researches the available universe, selecting and combining a range of specialist managers with the people and processes that will withstand the speculation that often accompanies bubbles and the necessary insight to select the best long-term investments.

There is no way of predicting that a sector is going through a bubble phase and will imminently collapse. The specialists are telling multi-managers that oil and commodities look vulnerable to a slowdown in global demand, that UK house prices look expensive in terms of average earnings. They point to a monetary bubble caused by low interest rates in the US, Europe and Japan that have caused excessive consumer borrowing. Precious metals look to have high valuations unless the predictions of higher inflation are founded. Others argue that fear is holding back some sectors after investors got burnt in previous bubbles. One such sector is internet gaming, which is trading at attractive valuations given its cash generation and earnings growth potential.

The current state of the UK economy also suggests that all is well, that the economy will continue to thrive, with low unemployment, low inflation and healthy growth. Against this backdrop, economic distress is difficult to foresee and, unfortunately, it is often retail investors and non-specialist fund managers that bear the brunt of a bursting bubble. There is only one thing that can be guaranteed when the bubble bursts – the marketers will be back soon with the next big idea saying: “It’s different this time.”

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