Most agree on the danger of a bubble about to burst

Platinum Asset Management investment specialist Julian McCormack believes we’re in a bubble and it is about to burst and nearly 60% of investors attending the Morningstar Investment Conference agree with him.

By comparison, Magellan chairman, Hamish Douglass is not saying the bubble is about to burst, but he used the same Morningstar conference to suggest that if it did the impact could be around a 50% correct.

But it is McCormack’s dire prediction which seems to be resonating with investors with 57% of those polled during the Morningstar Investment Conference agreeing that there is a bubble and it is about to burst.

“Yes, we’re in a bubble that’s about to burst,” McCormack said. “The start point is valuations.”

And McCormack said that while it was arguable that the situation with respect to valuations had been in existence for two and half years, markets were now witnessing the “spectacular emergence of the retail investor”.

“Retail investors in the US have never had this level of exposure to equities – this is a dangerous part of the cycle because it is the part of the cycle when people are having a bit of a lash and they’re doing it on gearing which is pretty spectacularly dangerous,” he said.

McCormack said the gravity of the situation had only been matched in 2007 and 1999 but that the current bubble was significantly different.

“In summary you’ve had this mechanical forcing of asset prices and huge stimulus has poured into equity markets particularly in the United States,” he said. “It’s a bubble, it’s a classic bubble – [but] nothing like 2007 and 1999 which were systemic issues.”

But McCormack noted that bubbles have “anti-bubbles” which were investments which could be identified to ride out the situation.

Speaking on the same panel, Yarra Capital’s Katie Hudson was less disposed to the notion of a bubble bursting and suggested that a pullback was more likely than a crash while noting the challenges of navigating a rising interest rate cycle.

However, like McCormack she pointed to the need to identify suitable investments including companies with defensible revenue streams and technology companies which have real earnings.

Fidelity’s Katie Howitt endorsed Hudson’s views regarding a pullback rather than a crash but also noted the attraction of ‘boring’ stocks.