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Overvaluation in every asset class means little room for manoeuvre
Thursday 23 Dec 2021 Author: Ian Conway

No Christmas story would be complete without a Scrooge character, and this year Alasdair Nairn, co-founder and chief executive of fund management firm Edinburgh Partners, has donned the mantle.

In The End of the Everything Bubble, Nairn explains why he believes $75 trillion of investor wealth is in ‘mortal jeopardy’ from dangers lurking in every asset class and why the bubble is about to burst.

Nairn has forged a successful career as a professional institutional investor, having been chief investment officer at Scottish Widows before setting up Edinburgh Partners, prior to which he worked at Templeton and Murray Johnstone, so to think of him as an investment bear would be a mistake.

He has, however, been around a long time and seen more than one stock market cycle. He also warned of significant corrections both in early 2000 during the tech bubble and in 2007 on the eve of the great financial crisis, so he has form.

What worries him about the current bubble is that valuations and speculation seem to be greater than ever before. He believes we are currently witnessing ‘an extraordinary period that in many respects has no parallel in the history of financial markets’, and warns it is ‘extremely unlikely that the process of rectifying today’s excesses can be anything but a painful one’.


Famously, Nairn’s former boss Sir John Templeton called the phrase ‘this time it’s different’ as the most dangerous words in the English language. Ironically, this time it may truly be different, and not in a good way.

With interest rates at their lowest level for centuries, governments have accumulated more debt than at any time in history, yet through the suppression of interest rates over a quarter of investment grade bonds globally trade on negative nominal yields and the real (inflation-adjusted) yield on US Treasuries has been negative for the last two years.

That has forced investors to speculate in equities, which in the US are already far above their 1929 and 2000 peak valuations, and in all manner of real and alternative assets such as cryptocurrencies.

The problem now is that there are no pockets of undervaluation nor is it possible to easily find uncorrelated assets other than cash.

While acknowledging that trying to pinpoint the cause or the timing of the downturn is virtually impossible, Nairn advises that ‘the first and most urgent requirement is to create a liquidity reserve which can be quickly deployed when there is sufficient clarity to understand what the new world will look like, and what the new investment framework will be after the end of the everything bubble’.


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