Investors chasing growth stocks creates both danger and opportunities
PE premium for UK growth stocks over UK value
Stock market manias always start with some grounding in solid fact, before investors get carried away and drive up valuations to extreme levels. Eventually, of course, the bubble always bursts and investors are left ruing hefty losses.
The technology mania of 1999-2000 that crashed and burned so spectacularly had at its root the truth that new technologies were set to change both companies and the world. Likewise the Railway Mania in the 1840s and no doubt the South Sea Bubble a century earlier.
Today’s mania, as the chart shows, is for ‘growth’. Like its predecessors it has its roots in solid facts. Interest rates at close to zero (or even negative) means that profits in the distant future are worth more today than they were when interest rates were higher. This justifiably provides a boost to growth stock valuations.