<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Nico Katzke, head of portfolio solutions at Satrix. Nick, always appreciate the early morning. We are \u00a0talking around \u2018bubbles\u2019 and whether we should worry. There\u2019s an interesting piece out from you.<\/p>\n
Let\u2019s start, I suppose, with definition of a bubble. I\u2019m keen to head to Greenspan\u2019s \u2018irrational exuberance\u2019 comment. I think that was in late \u201996. But broadly, it\u2019s irrational pricing in FOMO [fear of missing out]; but underlying it is often proper quality.<\/p>\n
We think of some of those dotcom stocks. Capitec was often accused of being a bubble. Yet here we are today.<\/p>\n
Read: \u2018FOMO really got me\u2019: Taiwanese go deep into debt to amp 100% stock rally<\/p>\n
NICO KATZKE: Morning, Simon and good morning to listeners. It\u2019s great to speak to you again. Yes, interesting topic \u2013 and I think it\u2019s incredibly relevant to us all. Our view on AI and technology stocks more broadly has actually been quite consistent in recent years.<\/p>\n
We remain of the view that, to your point, based on traditional accounting measures tech companies may look expensive now. Absolutely.<\/p>\n
But we have to acknowledge the inadequacy of traditional accounting and asset-pricing models in valuing technology companies whose book values often reflect immaterial things like IP, first-mover benefits, network effects \u2013 and the list goes on.<\/p>\n
Read\/Listen:
Investing in a world gone tech-crazy
The hunt for value in the market
AI Wave: CapEx could rewrite market rules<\/p>\n
So to the casual observer the problem is that when experts make statements to the effect of labelling companies or entire sectors as \u2018overvalued\u2019 and \u2018clearly in bubble territory\u2019, it\u2019s not simply a matter of semantics. It directly affects investor behaviour.<\/p>\n
Over the past few years we\u2019ve seen many advisors and investors choose to sit on the sidelines and avoid tech exposure completely and tech-heavy sectors like the Nasdaq or the S&P 500, which have clearly not served their portfolios well.<\/p>\n
The question I think remains why people are actually so quick to dismiss new technologies in the first place.<\/p>\n
SIMON BROWN: That\u2019s actually a great point because many of these bubbles \u2013 and to be clear, not necessarily always, but I\u2019m running through various bubbles in my head \u2013 are usually about that new technology which, to your point, often current accounting principles don\u2019t quite fit, truthfully, investor understanding.<\/p>\n
SIMON BROWN: We throw around the term AI. We don\u2019t know what AI is going to look like in 10 years\u2019 time. We know it\u2019s going to be something. But exactly what I don\u2019t know.<\/p>\n
NICO KATZKE: Absolutely. And I think it\u2019s maybe important to take a step back and just ask what it means when we say, \u2018a bubble\u2019, I think it refers to periods \u2013 and you mentioned it at the start \u2013 where investors are irrational in their valuation of assets, where a buying frenzy leads others to participate as well, and this further pushes up the price and causes a reinforced frenzied buyer\u2019s market.<\/p>\n
Oftentimes what labels a bubble is that this happens without due consideration of the actual investment case. Now, to your point, there have been many examples of this in the past, but those are always only ever clear in hindsight; that\u2019s the irony.<\/p>\n
Read:
Boring stocks are good for the markets
Mag 7\u2019s weakness is starting to become a problem for Wall Street
IMF says AI helps offset war-driven slowdown but sees risks<\/p>\n
And in fact, there are equally many times where many cried wolf, only to later regret not investing in the companies or technologies after their use cases have become clear.<\/p>\n
That\u2019s not how you make money \u00a0in the market. Johnny come lately is a poor man. The reality is that Mr\u00a0Market has in the past been remarkably efficient at pricing assets and predicting trends, offering very few instances of obvious opportunities to either buy or sell in hindsight.<\/p>\n
But I think fundamentally, if we just come back, when it comes to valuing assets we always need to compare the price paid today with the future earnings potential of a company tomorrow.<\/p>\n
Whenever future earnings potential is uncertain, it complicates the analysis. Let\u2019s take a simple example.<\/p>\n
If Ford retailed at multiple, multiple times its projected earnings, you\u2019d more easily conclude whether it\u2019s expensive or not, as its business model is actually quite well understood. It builds and sells cars, meaning its scaling potential is physically limited.<\/p>\n
Read: Wall Street\u2019s AI race is fuelling new fears of crowded trading<\/p>\n
But for companies building a technological framework whose end state is as of yet unknown, it becomes extremely complicated to do a fundamental analysis. And the best we can do, I believe for now, is to be slower in concluding that prices paid today for companies at the forefront of technological development are not a fair reflection of how these companies will mature.<\/p>\n
Shouting \u2018bubbles\u2019 based solely on historical comparisons for me seems like lazy analysis that needs a deeper clarification of where exactly the market is being irrational.<\/p>\n
SIMON BROWN: That\u2019s a great point. I remember the early days of the internet \u2013 sort of early 2000s \u2013 and I remember the talk around watching a video on my phone. I thought this is the stupidest thing I\u2019ve ever heard. But of course, I didn\u2019t imagine what the phone was going to become, the speed or anything. Now that\u2019s how we spend many of our days.<\/p>\n
You also make a great point, and I take your point that bandying around the word \u2018bubble\u2019 in and of itself is not helpful. In fact, we can say it does a [disservice] to investors. But also the optimal number of bubbles you make in the article you write is not zero.<\/p>\n
We need this because this is around that technological advancement. This is how society moves forward in those big leaps.<\/p>\n
NICO KATZKE: Exactly. I make the point \u2013 it \u00a0might be controversial \u2013 that bubbles generally get a bad rap. This may sound strange, but I really believe that the optimal number of bubble-and-busts is not zero.<\/p>\n
We actually need periods where the market loses, let\u2019s call it, its short-term sensibilities and relaxes its typical risk tolerance, spurring the development of technologies propelling society forward \u2013 internet, railways, et cetera \u2013 which at the time seemed expensive, irrational. But it\u2019s stuff we use every day.<\/p>\n
Read:
S&P 500 concentration risk
Burry vs the AI establishment: A bubble, or just fizz?
Mag 7\u2019s growth outpacing the S&P 500<\/p>\n
Now I cannot foresee a world where we will become less reliant on generative assistance. And as we transition into this uncertain world, it seems to my mind most irrational to label the technology as a bubble. That\u2019s, for me, the most irrational thing currently.<\/p>\n
Now, will there be disappointment, Simon, in AI? Absolutely. Some companies will disappoint, but I believe ultimately that we are at an inflection point in how we utilise information technology more broadly.<\/p>\n
Now, will you and I still use ChatGPT in five years? Maybe. Maybe not. How will we use it in our daily lives? Who knows?<\/p>\n
From our point of view, AI integration will likely be more gradual than many make it out to be. I don\u2019t think you\u2019re going to wake up one day, and your wife and kids and job have been taken by AI.<\/p>\n
I think broad adoption will happen organically, the same way we began using email or the computer or, more recently, become comfortable with teams calls and working from home.<\/p>\n
These things happen gradually and dismissing the technology just because we deem the accounting measures to be out of whack with historical comparisons, I don\u2019t think is sensible.<\/p>\n
Read:
Three years of AI mania: How ChatGPT reordered the stock market
How AI and semiconductors are reshaping the market<\/p>\n
Another interesting point that I just want to quickly make, which I think a lot of listeners might not know, is that as of today you\u2019re getting actually more exposure to AI in the MSCI EM Index than in both the Nasdaq and S&P 500. That\u2019s a great irony.<\/p>\n
This is largely as a result of large exposures to TSMC [Taiwan Semiconductor Manufacturing Company] and a few Korean stocks.<\/p>\n
But the point is it\u2019s becoming harder to find suitable diversification for those looking to avoid tech exposure completely.<\/p>\n
What we\u2019ve seen is a lot of investors sitting on the sidelines and wanting no equity exposure because they look in the short term, and they want to avoid short-term pain but ultimately pay away long-term opportunities to create wealth over the long term.<\/p>\n
SIMON BROWN: Yes. And your EM example is great. I was buying some of the EM\u00a0ETFs last year and they\u2019ve become tech. As you said, they are just tech, and we\u2019re early.<\/p>\n
Father got a fax machine in the \u201980s and he couldn\u2019t fax anyone for the first six months because no one else had one. And then five years later everyone had them. Twenty years later, they were gone because of email.<\/p>\n
Read: Choosing between S&P 500 market-cap and equal-weight ETFs: A strategic investor\u2019s guide<\/p>\n
We\u2019ll leave it there. Nico Katzke, head of portfolio solutions at Satrix, appreciate the early morning time.<\/p>\n
#Tech #bubbles #emerging #markets<\/p>\n","protected":false},"excerpt":{"rendered":"
You can also listen to this podcast on iono.fm here. SIMON BROWN: I\u2019m chatting now…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[4],"tags":[11115,211,166,317],"_links":{"self":[{"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/posts\/12208"}],"collection":[{"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=12208"}],"version-history":[{"count":0,"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/posts\/12208\/revisions"}],"wp:attachment":[{"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=12208"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=12208"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=12208"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}