A couple of months ago, we asked a few allocators whether we were in - or approaching - bubble territory on the basis that many stock markets around the world were surging skyward.
Since then things have cooled off a bit. The FTSE 100 and the Nikkei 225 have ceased their upwards climb and after months of rising and rising, the S&P 500 spent most of April trending down - though it has since gone back to rising.
The price of bitcoin, which had been surging dramatically earlier this year which we cited as a potential warning sign, has also since plateaued.
Emiel van den Heiligenberg, head of asset allocation at LGIM, has been keeping his own bubble index since beginning his career in 1999 as a way of tracking overexuberance in markets.
“Well, part of my DNA as an investor is to always worry about something,” he said. "There is in the macro space so much in theory that could go wrong, and there's always some imbalance developing somewhere.”
Van den Heiligenberg was new to the industry at the burst of the dot-com bubble in 2000, and that began his fascination with how market manias can brew and erupt.
He created a list of 20 indicators, both qualitative and quantitative, that could signal potential danger and these have since expanded to 36.
One, which he says has crept up just last week in the brief resurgence of GameStop shares, is the piling-in of retail investors into risk assets.
“So lottery ticket behaviour, that is actually one of the many signals that speculative behaviour is increasing,” he said.
“And the other thing which you often see in a bubble is that new investors get sucked into the market, as with the internet in the 90s.”
Theory will only take you so far
The Dutchman heads up LGIM’s multi-asset team and so we wondered how these potential storm clouds may feed into their asset allocation outlook for the rest of the year.
He explained the team has gone underweight equities but this decision has little to do with any bubble risks occurring.
Van den Heiligenberg said that today’s environment resembles a 1997-2005 environment – meaning he believes we are around three years away from such a bubble potentially popping.
He said the team is currently more worried about potential negative consequences if a soft landing fails to materialise than any concerns around market mania per se.
“Sentiment still is quite optimistic and we want to lean against that optimism, now obviously that has been relatively painful for shares as the market has continued to rally,” he said.
One area in which he hopes LGIM is ahead of the curve is in UK equities, where they have recently gone long mid-caps. He said the forthcoming general election has centred the focus of debate towards how the government can make the British economy and markets more attractive for investors, which he sees as a good sign.
Indeed Asset Allocator has also been monitoring signs of a potential bubble lately, having recently covered the level of US dominance in allocators’ preferred global funds, relative to the MSCI World’s 70 per cent wedge.
