Economics & Markets

Bubbles mean trouble

By AMP Capital

What is a bubble? AMP Capital Head of Investment Strategy and Chief Economist Shane Oliver puts it down to two main factors.

“The first thing is a degree of over valuation. That is a situation where the price of an asset has diverged dramatically from the underlying fundamentals of the asset. Share prices have risen dramatically relative to earnings and dividends, or property prices have risen dramatically compared to people’s incomes and rents,” he says.

The second factor Oliver describes as being evident in bubbles is euphoria. “Prices are inflating dramatically as investors say, ‘I have to be invested in this asset because the only way is up. How do I know that? Because it rose last year and the year before’. Therefore you get over-valuation and a degree of bubbliness as investors extrapolate past rapid capital gains indefinitely. It then takes on a life of its own.” 

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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