Crack the bubbles or burst the bubbles..?
“Private credit funds mask defaults, bad loans: ASIC review”
“What if the bubble isn’t the biggest risk in markets?”
“AI is the bubble to burst them all”
“Stockmarket hype masks hidden hazards for investors”
These are some of the headlines in major media outlets in recent weeks about the “Bubbles”.
Now before you panic, please remember that newspapers sell dramatic headlines. However, there is a lot of bubble talk globally; too frothy to ignore.
There’s three main categories on market bubbles currently: Gold, AI and Private credit/equity. To understand a bubble, you need define its transparency and size (aka risk).
Gold is a widely traded, single commodity so it’s like a big, single, clear bubble. It may pop but at least you can see the other side. Plus it’s showing signs of deflating.
AI is lots of little bubbles clustered together. Therefore, harder to define and if one bursts, it’ll probably pop all the cluster leaving a big mess on the floor. For AI start ups (a bit like the dot.com collapse in the early 2000’s), those invested directly will feel a lot of pain. There will be contagion, but that pain will be less elsewhere.
Private credit and private equity are two completely different markets but I’ve bundled them together because the “private” nature of them means they are fluid and hard to define at all; more like foam. Actually like a foam party that’s lots of fun, French bubbles all round and everyone is having a good time making money.
But, given I’m in Adelaide, what if the foam looks like fun but contains a proverbial algal bloom?
The truth is we don’t really know because, in the case of private credit/equity markets, you can’t see through it. You can’t easily measure the risk that sits within it. The returns may be great but are they good relative to the risk? In the GFC, there was lots of flotsam (damaged investments) and jetsom (unwanted investments) floating around in CFD’s and arguably now some private credit and equity investments could do the same. The problem isn’t the markets nor the funds but the fact that the foam makes things opaque. A blowtorch (i.e. government regulation) will dry up any liquidity really quickly. Value can evaporate.
So what to do about it? Firstly, understand your investment exposure. An adviser can generally identify this but many investment funds (including super) are less prepared to disclose their holdings (which is a red flag itself!). Then, target investments that investors would flee to if a bubble bursts, particularly listed investments with high liquidity. This doesn’t mean just going completely defensive; in fact private credit and gold are both considered defensive and in a bubble.
A balanced and growth portfolio can have exposures that are not directly lined up with these bubbles and may even present some opportunity if they burst.
Will Chapman Dip FS(FP)
Authorised Representative (No 311745)
