The Nasdaq CCMP index has reached an all-time high this week, as it breached the 6000 mark, but does this mean we are in a technology bubble?
Loïc Schmid, head of asset management and CIO at GS Banque believes that's where we're headed and has clashed with the CIO at Banque Pâris Bertrand Sturdza and PBS Investments, Emmanuel Ferry, who sees no evidence of a bubble.
Sparking from a LinkedIn post that attracted over 8000 views this week, the two voiced their opposing views and have since spoken to Citywire Switzerland.
We are in the ‘tech bubble 2.0,’ Schmid explained, and it is being caused by herd behaviour, particularly when retail investors enter the space.
‘My problem with all this hot tech today is that investors are piling in and they are not looking into the valuation, they are just believing in a dream,’ he said.
Even so, Ferry argues that while technology is a big trend at the moment, it is not sufficient to look at the spot price of an index to assess whether it is in a bubble or not.
Valuation is the key component, and while the market is not cheap, it remains far below previous peaks.
‘As an example, if you look at the price earnings ratio today, the Nasdaq is trading at 27x earnings, which is high but we are still very far from the previous peak at 72x earnings,’ he explained.
Valuation is demanding because the equity bull market is very mature, having begun in 2009.
Disagreeing, Schmid said: ‘Many investors are pouring millions of USD into companies which continue to have negative free cash flow and are extremely overvalued based on pure fantasy sustained growth,’ he said.
He adds: ‘Why should we compare to the peak of 2000? Emmanuel had a point but I'm not saying the bubble is about to implode but we are clearly in a bubble, it's obvious.’
Factors to watch
According to Ferry, the best metric to assess if we are in a bubble or not is to look at the tech market cap as a percentage of the total market cap.
Today, it's roughly 20% and at the bubble level in 2000 it represented 35%.
‘As valuation and the size of the total market cap are not at extreme levels and if you look at the level of the price index, when you adjust the level of the market by inflation, we are still 17% off its record high, so there is definitely not a tech bubble,’ Ferry reasons.
The quality of today’s companies and their fundamentals is another key factor in explaining why we are not near the bubble seen in 2000, according to Ferry.
At present, there is too much cash on the tech balance sheets and many tech companies are value stocks as a result despite them being growth companied by definition, he said. This they agree on.
Ferry suggested there are possibly signs of an equity bubble in the low volatility and high quality equity spaces as well as in the income universe at large.
‘So yes there is an income bubble today following the extreme monetary easing, zero interest rate policy, QE but there is definitely not a bubble in the tech sector, today the sector is very attractive because fundamentals are healthy and valuations are not extreme.’
Schmid highlights Uber as the ‘mother of all bubbles’, and an indicator for the sector as a whole.
The ride-share giant reached a valuation of $70 billion despite announcing losses of $3 billion, which is why it wouldn’t be a surprise if valuation were to drop dramatically, Schmid said.
It is the disruptive, new tech firms that are now overpriced and that’s where the bubble is, he said.
‘There's still value in the big tech names because they have tons of cash and they are going to give it back to shareholders.’
In response, Ferry said: ‘Uber is a new concept and a disruptive business, so how do you assess the valuation of the business? There are no competitors and you are not able to asses over the long term in normal market conditions. ’
This is also the case for Snapchat, which is a great indicator of ‘market valuation craziness’, according to Schmid.
Ferry also points to the fact that few of these companies are actually listed.
‘Of course if you compare Microsoft with Tinder or Snapchat, it's completely different but when you buy the Nasdaq, you don't have any exposure to Uber.
‘There are many value opportunities in the tech sector, which was not the case in 2000.’
'Despite being unlisted companies, they are still pushing markets and having an overall effect', Schmid counters.