The investment world is one that can go dangerously wrong, should the bubble burst
So which of these is likely to pop first?
AGE OF TROUBLE
We have been living in an age of bubbles for the last two decades, as central bankers have repeatedly cut interest rates to support the stock market after disasters such as the dot.com crash and financial crisis.
AJ Bell investment director Russ Mould said tech, mining and oil stocks, property, global bonds, crypto- currencies such as bitcoin, and even art, wine and vintage cars have seen prices blown ever higher by cheap money: “The poor return on cash in the bank has forced investors to hunt for premium returns wherever they can find them.”
Bubbles usually burst when fearful investors make a dash back into cash, typically because of a recession, war or other crisis, and Mould said there is growing uncertainty as the nine-year stock market bull run draws to a close and US President Donald Trump threatens Russia with cruise missiles and China with a trade war: “Markets are starting to become more volatile after a long period of unusual calm.”
Last year, Sam Lees, head of research at FundExpert.co.uk, warned of two bubbles, bitcoin and the US stock market.
He has added global bonds to that list: “Bubbles rarely happen in isolation, the conditions that cause one bubble typically trigger others as well.”
Years of near-zero interest rates and quantitative easing have left the world awash with cheap money and mounting debts.
Lees said as the US Federal Reserve drives up interest rates, the crash will come, with low quality “junk” bonds vulnerable.
“You do not get a correction in this sort of bond. You just get wiped out.”
Bitcoin surged 1,800 per cent in 2017 to peak at $20,000 in December, then its bubble burst.
Last week it staged a surprise rally to around $8,000, but many investors are still nursing sore heads.
Other alt-coins such as litecoin and ethereum have seen similar sharp falls, inflicting major hangovers on those who came to the party late.
James Clunie, head of strategy, absolute return at fund manager Jupiter, said the sector’s troubles could signal danger elsewhere as risk appetite plunges: “Bitcoin’s plight could be a bellwether for a wider change in investor sentiment.”
There are bubbles everywhere and Bitcoin is one that is close to popping
You do not get a correction in this sort of bond. You just get wiped out
Last year’s other red hot investment was the so-called FANG stocks, tech giants Facebook, Amazon, Netflix and Google, which have made big money for early adopters.
If you had invested £1,000 in Netflix when it floated in 2002 you would now have an incredible $256,331, according to the Waterstone Group.
Since floating in 1997, Amazon has turned £1,000 into $972,563, but the party may now be over amid the Facebook data scandal and President Trump’s attack on retail behemoth Amazon.
Clunie said a rush into “glamour” stocks is quite common near the end of a bull market, typically signifying late-cycle exuberance: “The FANGs are potentially in a bubble.”
People have been warning of a UK property bubble for years, but house prices continue to float upwards, albeit at a slower pace.
Last week’s Halifax house price index showed prices rose 2.7 per cent over the last year to a record high £227,871.
Property has been a fabulous generator of wealth, with the average Briton aged 55 or older seeing their home triple in value to £290,000 over the last 24 years, according to research from SunLife.
Russell Quirk, chief executive of online estate agent Emoov. co.uk, said after recent uncertainty, property is ready for spring: “Affordable mortgages, falling unemployment and lack of housing stock will continue to stimulate the market.”
Faisal Durrani, partner at property experts Cluttons, said that despite Brexit uncertainty, rising interest rates,stagnating incomes and affordability concerns, UK property should hold up because of strong demand and limited stock.
However, he sees plenty of potential property bubbles in other parts of the world: “After fantastic growth in Toronto, Sydney and Hong Kong, as well as many mainland Chinese cities, caution has begun to creep in.”
The prime central London market has slipped following years of double- digit growth, but this could actually work in its favour now.
“As a safe haven, London could attract nervous international investors, driving prices higher again,” added Durrani
Property is constantly on the brink of bursting, as prices change all the time
MoneyToTheMasses.com director Damien Fahy said identifying a bubble is only easy after it has burst, by which point many ordinary people have lost a lot of money.
However, he does suggest one good warning sign: “When making money looks so easy that anybody can do it, as we saw last year with bitcoin, then you are usually well into the mania phase before the crash.”
Fahy said the big problem is that when a bubble bursts, even those who have shunned the hype can still get punished: “When bubbles burst recessions typically follow, and that hurts everybody.”
Mickleach.com is your news, entertainment, music & fashion website. We provide you with the latest news and videos straight from the entertainment industry.