The growth of stocks such as Tesla and Afterpay is a “much bigger bubble” than during the dot-com bubble of 2000, according to Platinum.
In an investor update, Platinum chief investment officer, Andrew Clifford, said he was cautious about the levels of growth seen by these two companies among others.
“I’m not talking about the FANG companies, those are broadly dull investments, I’m talking about those companies which are trading at market values of 20x/30x, even 50x sales. And I have to use sales because typically there are no profits yet.
“Tesla and Afterpay are good examples of this. They have done extraordinarily well to get where they are and we don’t doubt they have bright prospects but the issue is you need to make heroic assumptions about the future of the business over the next decade to make sense of the stock price.
“When people say ‘it’s not like 2000’, I agree, this is a much bigger bubble.”
Shares in Tesla had risen 420% over the past year while Afterpay had risen 332% over the same period.
He described the market environment as being gripped by a “speculative mania”, especially in the US. This was characterised by the huge volume of initial public offerings, the “incredible” performance of these stocks on their first days of listings and the high level of retail investor activity such as was seen with GameStop.
This type of environment would subsequently be hurt by the factors affecting markets such as rise in interest rates or rising bond yields, particularly speculative stocks.
“As we see this strong economic rebound, the yield on 10-year government bonds will rise, that is the natural outcome,” Clifford said.
“On the one hand, growth is good for companies who will see this reflected in their profits but higher 10-year yields can affect valuations and this is most concerning at the speculative end of the market where valuations are highest. Rising long-term interest rates are a real threat to these speculative companies and it will be a challenging year for investor in those chosen names.
“On the other hand, where valuations are reasonable and earnings are accelerating, higher stock prices are possible. It can be hard to envisage share price rises as the speculative bubble is popped but that is exactly what happened at the end of the tech bubble when old-world companies rallied strongly as tech collapsed.”