Investors become myopic during bubbles. They believe the universe of attractive investment opportunities is small and growth can be found only in a few select sectors. As we’ve repeatedly highlighted, it is exactly that narrow-mindedness that presents opportunities because investors ignore the broad range of potential investments outside the bubble.
Today’s bubbles are following that precedent. Investors are squarely focusing on technology, innovation, disruption, cryptocurrencies, and housing, but very little else. They seem enamored with vacations in outer space and electric vehicles, yet ignore the dire need for improving US logistical and electrical infrastructure.
Ironically, many equity markets around the world not known as hotbeds of innovation and disruption are outperforming NASDAQ so far during 2021. Our guess is most investors are completely unaware of the fundamentals supporting these markets’ outperformance.
Chart 1: Equity markets outperforming NASDAQ 100 year-to-date
Source: Richard Bernstein Advisors LLC. MSCI, Bloomberg Finance L.P. For Index descriptors, see "Index Descriptions" at end of document.
Bubbles’ misallocation of capital creates opportunities
Bubbles misallocate capital within the economy. Investors often extrapolate shorter-term price momentum for longer-term potential returns, but bubble sectors attract too much capital which actually lowers future returns. Too much capital chases too few ideas. However, the overcapitalization of bubble sectors means non-bubble sectors become relatively starved for capital and ultimately provide better long-term returns.