8th November 2023
I was just starting my Asian asset management career when I heard the term “irrational exuberance” used by former US Federal Reserve Chairman, Alan Greenspan, when referring to the frenzied buying of internet stocks in the mid-1990s, a frenzy which ultimately led to the bursting of the “Dot-Com Bubble” and subsequent stock market crash in the early 2000s, coincidentally the same year Hong Kong’s Mandatory Provident Fund (MPF) was established.
The context of Greenspan’s comment was his questioning whether central banks should pre-emptively intervene and address extreme investment behaviour? History suggests they decided that they should not, delaying interest rates till just before the bursting of the bubble in late 1999.
You would think investors, including MPF members, would learn from past booms and busts, but usually due to greed, hope, or fear of missing out they rarely do, resulting in irrational exuberance not just in equities and technology companies but across all asset classes.
During the uncertain COVID-19 times irrational exuberance led investors to buy 10-year US Treasury bonds on a measly yield of just 0.30%, since then interest rates have risen spectacularly. The same bonds today yield close to 5% which is disastrous for those that bought them at 0.30%. Basic bond lesson – when yields go up, the value of the bond held goes down.
When interest rates were so low, investors were incentivized to take risks and our good friends at Hong Kong independent wealth manager, Belvest Investment Services, share an anecdote offered by one of their fund managers.
At around the same time US Treasuries were paying investors a coupon rate far less than 1%, Moonpig, a UK based online greeting card and gifting business, launched their IPO. With long dated government bonds offering such low yields, companies exhibiting strong growth prospects, such as Moonpig, are highly attractive as investors search for better returns.
Moonpig had a lot going for it. It had 70% of the UK’s online greeting card market, an online segment growing faster than many other product categories, such as cosmetics, clothing, footwear, and homewares, and despite its dominant market share the company was still gaining market share. A powerful brand, a vast customer database accumulated over almost 25 years and a marketing budget that is a multiple of all its competitors’ budgets combined characterized the dominance of Moonpig. A compelling investment story, and for whatever reason – greed, hope, or fear of missing out – everyone wanted a piece of it. Irrational exuberance saw frenzied buying of the stock shortly after its IPO that pushed the company’s valuation to 52x earnings; this compared to a market average of around 11x. Fast forward to the present day. The company’s long term business model hasn’t changed but high interest rates mean investors can get better returns with less risk, a result of which is the shares can now be bought for 80% less than at their peak.
So what does an oddly named greeting card company have to do with MPF? Well everything. 40% of MPF’s inflows went into US equities last quarter. Given US equities only makes up around 6% of MPF’s market share this demand for US equities is irrational. Exuberance driven by greed, hope, or possibly the fear of missing out. Conversely, Hong Kong/China equities saw the opposite and experienced outflows during the corresponding period; doubtless much of the money switched to US equities. With over 20% market share, Hong Kong/China equities is MPF’s largest asset class and all MPF scheme sponsors including leading players Manulife, Sun Life, AIA and HSBC offer excellent Hong Kong/China equity funds within their MPF schemes, however after another year of negative investment returns it appears MPF members are running out the door, looking for better returns elsewhere and perhaps at the wrong time. Like Moonpig, China’s long term long term story hasn’t changed, but there’s both a time and price to pay for the story and that time and price isn’t based on greed, hope or fear of missing out, rather its dispassionately based on one’s personal and long term retirement objectives.
This article was written by MPF Ratings, Hong Kong’s independent provider of MPF research, views and education, in association with Belvest Investment Services, a leading Hong Kong based independent financial planning and wealth advisory group.