How to spot a market bubble
Matteo Riccardi, Chief Investment Officer at Bipiemme vita spa explains why he doesn't believe insurers are facing a technology bubble, but a health bubble could be on the cards
Insurance Investorposted on Wednesday, January 13, 2021
Insurance Investor: Do you think that work from home implications and Covid-19 has created a bubble ready to burst in the technology sector?
Matteo Ricardi: I do not feel that we are in a bubble in the technology sector. It is quite natural to make a comparison between the tech bubble of 1999-2000 and today and the main difference is that 21 years ago, the bubble was generated by expectations.
At the beginning of the era of the internet revolution, there were a lot of expectations that changes could happen, and these changes have really happened now.
"The market has grown a lot, but I think that we are not in a bubble strictly speaking."
At the moment, after the Covid crisis and the fact that everyone has been forced to use technology more than even 12 months ago: consequently, nowadays we do not have expectations but have realised that we do have to cope with technology and this technology can change our lives, in both our personal and work life.
The markets are now pricing a real and effective change, no longer just based on speculation or expectations. The market has grown a lot, but I think that we are not in a bubble strictly speaking.
Insurance Investor: How do you distinguish between what is a good opportunity and what may necessarily be a bubble? Are there any identifying characteristics to help decipher this problem?
Matteo: The main difference is that during a bubble the markets price and trust expectations on a budget only for projects or business plans; when we talk about a good opportunity, we have some evidence that these businesses really work.
"It is really expectations on the one hand, and results and facts on the other"
If we talk about identifying characteristics, we can mention facts in relation to financial results and the improvement of revenues for the companies involved in these businesses. So, it is really expectations on the one hand, and results and facts on the other.
Insurance Investor: In terms of vaccines, there are a lot of companies going for the production of the Covid vaccine. When there are a lot of companies going for the same thing, how do you decipher what would be the best investment?
Matteo: I am not an expert on healthcare investments, but I would say that it could be more realistic and possible that we have a bubble in the healthcare sector.
I would like to be optimistic and to say that in 12 months the Covid pandemic would be over and the great effort in terms of building new healthcare infrastructures could, in the end and, in some sense, hopefully, not be very useful in a year's time.
Many scientists and doctors tell us to be aware and stay ready and cautious as we will have other pandemic crisis because of some correlation between climate changes and these health crises.
However, if we have to check the historical evidence, the flu of end of the first world war can be a very good benchmark of these crisis’s because all of the other epidemic cases have fortunately been much less heavy than the first.
There are many projects to start building new hospitals and new healthcare facilities in general, which, I do not know if they are really for the long term or not.
"I feel that a good investment opportunity could be healthcare facilities and infrastructure"
They most probably are, but from an investment point of view, in order to be able to understand if we are talking about whether this is a bubble or not, I feel that a good investment opportunity could be healthcare facilities and infrastructure which can be modular i.e. which can be easily changed and updated in the case of other events.
If we are in a more normal situation, these healthcare facilities could be used for traditional therapy which would be always useful.
In Western Europe and Italy in particular, we have another big issue, which is the aging of the population. This means that the healthcare systems should be improved and could be a good investment opportunity but, of course, it is different to manage a gradual issue like an ageing population compared to a very urgent and quick issue to be solved, such as Covid.
Insurance Investor: The post covid-19 recovery period will undoubtedly bring many investment opportunities in the private equity space. What do you expect to be attractive here and what do you feel we should be steering clear of?
Matteo: In the private equity space there could be a huge investment universe after the Covid crisis.
If we look at the broader sectors that are linked to the technology side, there are a lot of new companies and start-ups, which are “leveraging” a lot on the technology chances and that could be the perfect target of a private equity investment.
Areas such as e-commerce or new kinds of social relationships via technology and even healthcare with some remote type of healthcare assistance are all examples of this.
"In the private equity space there could be a huge investment universe after the Covid crisis."
There are a huge number of companies and business that can start and could be part of the private equity universe. I hope that this could also somehow be a new trigger for some macro-economic growth starting in 2021.
From an investor point of view, it is important to try to understand the type of business and the stage of the evolution of the business i.e. if they are very early or late in the economy cycle of their business as this could be crucial.