Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: Chief Economist Thijs Knaap on the risk of a (bursting) bubble due to the rising popularity of investing.
Investing is hot. In 2020, the number of Dutch people investing money increased by more than a quarter. That's the biggest increase since the 1990s. Many young, often inexperienced investors enter the stock market via smartphone apps from online brokers. And that is not without risk, according to some. Such as American top investor Jeremy Grantham. Earlier this year, he stated: "Private investors have created a historic bubble that is likely to burst before May." A bubble like at the turn of the century (the dot com bubble), when private investors massively invested in Internet companies, pushing stock prices to record highs. Until prices suddenly collapsed in 2000, which was followed by a slowdown of global economic growth. Although May is behind us, the question remains: is the chance of such a bursting bubble still real?
Thijs Knaap is cautious with terms such as bubble. "Before you use a word like that, you have to understand what causes the increase in retail investors (private investors, ed.). It's down to three factors. First of all, the possibilities for private individuals to invest 'just for a while' have increased, both in terms of convenience (via simple and handy apps) and in terms of costs (in the Netherlands, you also have parties where you can conclude transactions free of charge). The second factor is the corona pandemic: people are at home, sometimes have money to spare and the time to do something with it. So they started investing. The third reason for the growing popularity is the low, sometimes even negative, interest rates. Since July 1, you have to pay some of the banks to be able to save. That drives people to the market. Some of these factors will remain with us for a while – or for good. That technology, that low-threshold investment, is not going away. The low savings interest is also likely to stay with us in the coming years. The demand for stocks therefore continues to grow. These are permanent effects, so in that respect there seems to be no question of a boom, with everyone getting out en masse after corona and never coming back. Structural changes explain a larger part of the movement."
Other types of investors
However, according to Knaap, that's not the end of the matter. "Individuals are different from large investors. They tend to take more risks. They often buy individual stocks, for instance, and don't have a diversified portfolio. And call options are popular, which quickly increase in value when the stock goes up, but are worth nothing when the stock goes down. When you get these kinds of investors, all kinds of things happen. Especially in a time when people find each other on Internet forums where they can arrange to buy stocks of a particular company en masse to raise the price. Even if the company isn't really worth it. It happened this year with the loss-making GameStop and the bankrupt Hertz. By joining forces, hundreds of thousands of investors managed to increase the price to an extreme. That's problematic, and it's not even permitted. In fact, it's market fraud, but you try and do something about it with some many people behind it."