Equity indices in the US, Germany and India are trading at record highs as of end October 2013. These indices had first seen record highs in 2007-08, at the peak of the US mortgage led asset bubble. The burst of the bubble led to severe economic consequences and countries are yet to recover from the bubble burst.
The record high levels of equity indices as of October 2013 is not prompting any comments of asset price bubbles simply because there are no bubbles to be seen on the horizon. Commodity prices are way down from peaks seen in 2007-08 while real estate prices in the US are just limping back from lows. There has been a technology led boom in the US but the leaders such as Apple and Google have tonnes and tonnes of cash to support any kind of valuations.
India has seen a property bubble that is yet to burst given property price to income ratio rising multi fold over the last five years. On the equity side, valuations of strong cash flow companies such as ITC, HUL and TCS have risen sharply over the last five years but they are not in any kind of bubble territory as seen in the tech boom in the late 1990’s.
The fact that there are no bubbles building on the horizon, at least we cannot see it from our own analysis, brings down expectations of returns from markets. Bubbles are basically built on markets taking up valuations to levels that are unsustainable but the foundations of bubbles have deep fundamentals backing it. For example, post the tech bubble burst in the early 2000’s, tech companies have emerged bigger and stronger and are now dominating the world.
Spotting bubbles early and investing in them at the right time is a sure fire way of making strong gains in markets. Markets follow boom and bust cycles and at present it is a bust cycle rather than a boom cycle even though equity indices are trading at record highs. This is a great time to spot the beginnings of the next bubble. Bubbles can arise from anywhere and it is up to you to spot where they are coming from.
Where does one look for bubbles? The hottest business in India at present is ecommerce. Money is flowing into ventures such as Flipkart.com, Jabong.com, OLX.in and other such e-retail sites that are gaining huge traction amongst shoppers in the country. None of these ventures are close to making profits but private equity money is chasing them given rising user base. However none of these ecommerce sites are coming into the market for listing and at present only the wealthy who have invested with private equity funds are able to get access to them. E-commerce is definitely a bubble building and it remains to be seen at what stage the bubble is in, very early, early, growing or peaking out stage.
Similarly there will be other such kinds of ventures that are embracing the digital space in India. Looking for brick and mortar companies that are going digital could get one exposed to early stages of bubbles. Digital content is gaining huge traction over other forms of content and gaining exposure to media houses or publishers going the digital way could fetch handsome returns on investments.
In an ever changing world where technology is playing a larger and larger role in shaping economies, there will be many such onsets of bubbles. Spot the right one early, get the returns and move out before the bubble bursts.