Shares fly high but is ‘epic bubble’ set to burst?

ONE OF the oddest things about the pandemic is that global stock markets have climbed when logic suggests they should have crashed. But now analysts are warning this could suddenly reverse.

Many sober, respected pundits reckon we are in the mother of all stock market bubbles, with share prices overvalued by historical standards, particularly in the US.

A crash would inflict financial misery on ordinary investors, by hitting the value of their pensions and stocks and shares Isas. But are the doomsayers right?

Predicting a stock market crash is easy... saying when it is going to happen is almost impossible. Shares could climb a lot higher before they fall, so what should we do now?

FORGET THE FRENZY

Here is the scary bit. Renowned stock market historian Jeremy Grantham believes the “long, long bull market” that began after the financial crisis in 2009 has finally matured into what he calls a “fully-fledged epic bubble”.

Extreme overvaluations, explosive price increases and “hysterically speculative investor behaviour” are creating what he predicts will prove “one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000”.

At the same time, private US investors trading on mobile apps are piling into struggling companies such as computer games retailer Gamestop, driving their shares to insane highs.

Frenzied, irrational buying like this typically happens towards the end of every bull run, as we saw during the dot.com boom of the late 1990s, when every taxi driver seemed to be dishing out stock tips.

IMF directors have warned the buying spree is being driven by trillions of dollars worth of fiscal and monetary stimulus unleashed to fight the pandemic, and a correction is likely to follow.

THE LONG VIEW

Investors are understandably nervous, with Google searches for “stock market bubble” hitting a record high.

However, not everybody is gloomy. Emiel Van Den Heiligenberg, head of asset allocation at Legal & General Investment Management, said it is too early to call a bubble, as markets could power even higher.

He said the world is gradually emerging from the Covid-driven recession, and economic activity should pick up as people spend cash they have saved during lockdowns, and US President Joe Biden unveils virus relief packages worth trillions.

AJ Bell financial analyst Laith Khalaf said markets could climb despite today’s “irrational exuberance” and elevated stock valuations: “2021 should see economies opening up and company profits growing. Interest rates will remain low, giving investors little option other than stocks if they want to get a real return on their money.”

Khalaf said nobody has a crystal ball, so selling your shares now could backfire: “As an investor, it’s important to consider where the market will be in 10 years’ time, rather than 10 months,” he added. Khalaf said those with money to invest today could hedge their bets by drip-feeding regular sums to the market: “If there are dips, your new money buys more stock at the lower price.”

You only have until April 5 if you want to use this year’s £20,000 Isa allowance, but you could park money there until you are ready to invest it. Khalaf added: “Once inside the Isa wrapper, you can hold it as cash beyond the end of the tax year, and gradually feed it into the market.”

‘It’s important to consider where the market will be in 10 years’ time, rather than 10 months’

“The Express to me means gripping and trustworthy rock solid stories with an unshakeable moral core, relayed

with a twist and irresistible flourish”

Vanessa Feltz

FEELING BRAVE?

James Yardley, senior research analyst at Chelsea Financial Services, said there is a good general rule to follow with bubbles: “If lots of people are talking about one, which they are right now, it probably isn’t a bubble.”

He said shares are expensive but this is because there is no better alternative: “Interest rates are zero, bonds offer nothing. Today’s bull run could still have a long way to go.”

Yardley said big US tech companies such as Microsoft, Amazon and Apple continue to increase revenues and justify high share prices. “When companies grow this fast, they don’t look overvalued for long.”

For those who still feel brave enough to invest more,yardley favours Asia, and suggests investment fund Guinness Emerging Markets Equity Income or Fidelity Asia Pacific Opportunities.

He said the UK may be a surprise winner this year, with Brexit over and Covid vaccines rolling out.

The London market has underperformed for years but now has catching up to do, and Yardley tips Axa Framlington UK Mid Cap.

SURVIVAL STRATEGY

Trying to predict the stock market is a loser’s game. Most should ignore talk of boom and bust, and leave long-term wealth in pensions and Isas.

To protect yourself, only invest money in the market that you will not need in the next five years. Older investors should be cautious as they have less time to recover any losses.

Everyone should also build a pot of cash to dip into during a slump, so that you do not have to sell shares at the bottom of the market.

Britons have faced a lot lately, and survived.we can survive whatever the stock market throws at us too.