Jupiter: Are markets repeating the Nifty 50 and dotcom bubbles?

So far, 2020 has not seen any let up in the strong headwinds facing Value investors, said Ivan Kralj, Assistant Fund Manager, Absolute Return. The spread in valuations between Growth and Value stocks worldwide has already been widening for an extended period of time, but has become even more extreme in recent months.

 

To Ivan, this feels like the market is experiencing a combination of both the Nifty 50 and dotcom eras. In the Nifty 50 bubble in the early 70s, no price was too high for large quality companies, and Ivan argues that the same is happening today. There is a persistent narrative in the market that the big tech firms, with their network effects, will become more and more dominant in a winner-takes-all economy and therefore justify market caps above $1tn.

Similarly, there is a modern equivalent of the dotcom bubble taking place in so-called ‘disruptive’ companies. These businesses are typically finding new ways to do old things, usually with a tech spin, including selling mattresses online, transporting passengers with the help of an app, streaming content online or selling vehicles. All of these disruptors have an exciting story to tell, but Ivan said many have no real prospect of ever making any money and their valuations are completely divorced from reality.

So what is driving the price momentum? Ivan suspects that a factor could be retail investor activity in options markets – the trading volume in out-of-the-money call options for glamour stocks has exploded, doubling in the last six weeks. The market makers who are selling those options are forced to purchase stock to hedge their positions, to the point where market makers are starting to appear as big holders on shareholder registers.

The speculative purchasing of options is associated with an inverted-V shaped price chart, with a sharp rise followed by a share fall, but Ivan said it is impossible to pinpoint when the shift will happen. One catalyst for a change in regime could be a late cycle fiscal stimulus from various governments (mainly China, but also the US, Europe and even the UK), as a response to the global slowdown caused by the coronavirus.

---

Important Information

This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued by Jupiter Asset Management International S.A. registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Switzerland and the UK: Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial Conduct Authority, registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited or Jupiter Asset Management International S.A.