Are We In A Financial Bubble?

To be honest, bargains in the stock market are really harder to come by these days. A check on the valuation of some of the major companies in Asia highlight the issue.

Company Name	Exchange	Price to Normalised Earnings
Tencent Holdings Limited	Hong Kong Exchange	68.2
Takeda Pharmaceutical	Tokyo Exchange	61.4
Hindustan Unilever Ltd	Mumbai Exchange	52.1
PT Unilever Indonesia	Jakarta Exchange	67.0
Amorepacific Corp	Korea Exchange	67.1
IHH Healthcare	Bursa Malaysia	85.2
Jolibee Foods Corp	Philippines Exchange	59.7

 

These are quite worrying figures. For established industry leaders such as these companies above to trade at such high Price to Earnings multiples do not seem sustainable. So are we in a financial bubble currently?

Before we try to answer that question, first we must understand what is causing this current phenomenon.

Since the Global Financial Crisis, we have not been living in a “normal” environment. A few things that have been happening. Many major countries are living in an ultra-low interest rate environment and many of the same countries are engaged in quantitative easing (printing money).

What happen when these two events occur? 

It means that credit is more easily available and financing is cheap. This also means that most bonds yield are very low. Thus, investors would be searching for higher returns in other asset classes; predominately in the equity market and in the real estate market. That is why prices of these two asset classes across the region have appreciated rapidly over the last six years. As long as interest rate remains low and government continues printing large amount of money, there will be higher and higher demand for these assets, putting their valuation up and their yield lower.

Yet, for us to see a reversal in these trend, the flow of credit need to slow down and the interest rate environment need to rise. The question is who will that happen? Unfortunately, no one might have that answer.

So are we in a financial bubble? It depends, if long term interest rate rise and stay high soon, then yes. However, if we continue to live in an ultra-low interest rate environment for a long time, then these type of valuation might be here to stay.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned above.

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