Fears of Bubble in World’s Biggest Stocks

The world’s biggest companies could be hiding the biggest risks. That’s because companies such as Amazon.com Inc. and Alibaba Group Holding Ltd are overvalued, according to Robert Naess, a portfolio manager in the Multi Asset team who manages about $42 billion in stocks at Nordea Bank AB, Scandinavia’s largest bank.

“I’m a bit worried about the valuation of these very popular companies,” Naess said in an interview in Oslo. “The big stocks have become more expensive. There’s danger of a bubble in them,” Bloomberg reported.

Naess and his partner, Claus Vorm, quantitatively analyze thousands of companies, investing in those with the most stable earnings and avoiding expensive stocks, a strategy which has delivered a 10% return for the Global Stable Equity Fund this year. It has returned 12% on average in the past five years, beating 755 of its peers.

They prefer “boring” stocks, unlike the global behemoth technology companies that have led the global stock rally. Tech stocks sold off at the end of November, with the single worst day on record for the so-called FANG stocks. One of those stocks, Amazon, which has risen 55% this year, has a price-to-earnings ratio of 275 for 2017, compared with 18.2 on average for MSCI World Index.

“Long-term, 5-10 years, stocks that are expensively priced, such as Amazon, Tencent and Alibaba, will give a low return,” Naess, who also shuns Facebook, Inc., said. “I’m pretty certain that in the next 10 years the return on those will be lower than the market.”

The fund holds Apple Inc. and Alphabet Inc., which are “reasonably priced”. It has also bought a stake in Merck & Co., Inc. and increased in Amgen Inc., CVS Health Corporation and Walgreens Boots Alliance, Inc. Naess sees about 12% upside for the global developed stock market in the next 12 months provided companies continue to deliver expected earnings growth.

“2018 looks OK,” he said. “Normally, I think the earnings estimates are too high. But I believe earnings estimate could be too low next year given earnings are so good this year.”