A combination of large flows into passive equity funds, a strong focus on intangible assets and low interest rates have pushed valuations of some growth companies up to levels similar to the situation at the beginning of the 1970s, fund manager Jonas Edholm from fund company Skagen Fonder tells Swedish business newspaper Dagens Industri.
During the so-called Nifty Fifty bubble, investors and managers flocked to some fifty quality companies with strong brands and continued stable growth. The bubble burst during the 1973 oil crisis and many of the Nifty fifty equities fell steeply, in some cases by as much as 90 percent.
"These companies were expected to take over the world and continue to generate extremely high growth figures. The oil crisis then pushed up inflation and interest rates, causing the valuation of these equities to collapse," explains Jonas Edholm.
Dangers of index-investing
According to the fund manager, nearly USD 5,000 billion is currently invested in passive investment types, that buy and sell equities regardless of the company's valuation. Passive investment recently overtook active management in the United States.
"The passive flows do not at all reflect asset valuation, but only buy based on the market values of the companies in an index. When so-called active funds snag this trend, an environment is created where values reach extreme levels in some cases,” says Jonas Edholm.
The most expensive equities, or "newborn Nifty-fifty" as Jonas Edholm calls them, are dominated by US tech companies. Netflix and Servicenow Inc, where prices have rocketed, are two examples.
"There is a very strong belief that the companies' intangible assets can continue to generate growth at the same level as before and live up to the high valuation. That is probably too optimistic," says Jonas Edholm.
Instead, the fund manager predicts the return of value equities and has identified the fifty cheapest companies, or the "Thrifty fifty" as he has named them.
"Many sectors are traded at a valuation level that we have not seen since the financial crisis, including car part manufacturers, timber and commodity companies," continues Jonas Edholm.