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market | IST

Mad about Markets: Expert discuss how to stay burst-proof in a bubble

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“We are clearly looking at B2C e-Commerce that is gaining big time, we have seen Zomato go IPO and a whole bunch of other companies are lined up. That is the category that has benefited from this – both mega funding as well as the COVID. So e-Commerce is here to stay and also fin-tech. Look at sectors like ed-tech. You also want to be watchful about companies which are opportunistic,”said Arun Natarajan, Founder of Venture Intelligence.

In the last 1 year or so, central banks across the world have pumped in $6.1 trillion into the global economy! That's like 2 Indias being added to the world! It's found its way into a lot of unnecessary things. No different from splurging on absolutely pointless things, when there's a generous relative who gives you some cash when they leave. While a lot of this money was used to prop the economy, a lot of it also found its way to some mythical creatures like unicorns. Those mythical animals that are typically represented as a horse with a single straight horn projecting from its forehead.
However, in private capital terms it is any company that is valued at $1 billion or more, funded by venture capitalists (VCs). The name unicorn because they are supposed to be rare. They were rare. But it turns out, not quite, at least in recent times. So what was earlier a rare sighting, is not so much anymore not just in India, but also Sweden which has 8 unicorns per million people and of course, the Silicon Valley, that has nearly 14 per million people.
However, that's not the real concern. The real problem is them getting so much money in a world of liquidity.
When liquidity rises, it lifts all boats and any object with buoyancy. It's all fun and games till the tap is shut. Once the water dries up, you realize who had boats and who were holding on to just a wooden plank. The vast majority of unicorns have never made profit, yet billions have been poured into them by the world's largest, most adventurous financiers hoping to find the Amazons and Facebooks of the future.
A string of these unicorns are also lining up for IPOs, and the markets have gone crazy in anticipation and that's a larger problem now, because retail, new investors are now being exposed to this risk.
Before you dump your conventional investments and rush to invest into these mythical creatures, bear the consequences in mind. The backing of global investors and VCs provides no assurance whatsoever that all the unicorns will succeed.
So are you saying it is a bubble and we should worry about? Because bubbles too, have their place in society.
When we talk about a bubble in economies or markets, it immediately signifies something negative. But think about this - bubbles start with over-investment, and that makes room for innovation to happen and build infrastructure faster. For instance: The late-1990s dot-com era was a speculative bubble, it was created by the rapid rise and interest in internet companies. Getting big fast was key to survival, companies ended up sacrificing profits in the race to get a larger market share. The bubble burst caused almost a three year long free fall for the internet sector but it was not for nothing. All of the money poured into tech companies during this internet boom built out the infrastructure and economic foundation that would allow the internet to mature in a tangible, physical way. When the dust settled, stronger players like Amazon, Google etc emerged. In fact, this also laid the foundation of IT outsourcing and the boom that Indian IT saw. In fact, we have many such examples from the past. The electricity bubble in the US in 1880s it led to the laying of cables across the country, the real estate bubble in Japan led to serious infra development there. Bubbles are capitalism's way of an economic evolution.
The aftermath of a bubble burst can leave deep scars on economies as well as individual investors - in many cases, these may be irreparable.
Japan's lost decade is a classic example. The Japanese asset price bubble between 1986 to 1991 saw real estate and stock market prices go through the roof. Even though asset prices collapsed by early 1992, Japan's economic decline continued for more than a decade.
The US sub-prime mortgage crisis of the 2000s was nothing short of a nightmare - it led to the collapse of the largest American banks, and had far-reaching domino effects for the entire world. What started in the US quickly turned into the global financial crisis, and was followed by the great recession, which precipitated the European debt crisis.
Past experiences like the dot-com bubble prove that at times, investors think as a herd and that crazes often end with busts rather than booms.
Here's no taking away from the risk and rewards of a bubble, as history tells us. Let's then use it as a reference to protect ourselves from bubble-like situations! Yes, we do see a lot of companies' valuations rising like hot air balloons, so you have to be sure, to avoid those that are just hot air.
“History tells us that these things don’t last forever. So the risk factors – what happens in US is going to hit us very quickly, there is no doubt about it because there is no counter-balance in terms of other sources of capital. If interest rate cycles change, the impact into the private markets would happen quite immediately and there is no taking away about regulations that could change,” said Arun Natarajan, Founder of Venture Intelligence.
“We are clearly looking at B2C e-Commerce that is gaining big time, we have seen Zomato go IPO and a whole bunch of other companies are lined up. That is the category that has benefited from this – both mega funding as well as the COVID. So e-Commerce is here to stay and also fin-tech. Look at sectors like ed-tech. You also want to be watchful about companies which are opportunistic,” he said.
For the full show, watch the accompanying video.