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A bubble, in the economic context can be described as a situation when asset prices escalate way ahead of the underlying fundamentals. Finally, when the divergence between asset prices and their real intrinsic value hits the roof and can go no further, what we witness is the bursting of the bubble. There could be a sudden crash in asset prices or a prolonged period of contraction. The forces of the market follow their own self-corrective mechanism to arrive at the equilibrium.
From past experiences and historical references, you would know how financially disastrous bubble bursts tend to be. As an investor, you would never want to be caught unaware at the top of a bubble. So a question that arises naturally is-
Are there any bubbles brewing around that could be a matter of worry for you?
The answer, unfortunately, may be yes. Two sectors that appear to be forerunners are: Indian real estate and Indian ecommerce start-ups. As an article in Business Standard points out, there were nearly 1.3 million hits for a google search- 'Indian real estate bubble'. The same for 'Indian start-up bubble' stood at 13.4 million.
By that, it can be ensured that a lot of people are anxious about them. Let's move a step further and look at each of these sectors one by one.
The real estate bubble: The demand-supply mismatch
The real estate industry is facing a severe slowdown in many parts of the country and prices are showing signs of contraction. If you recall, real estate prices skyrocketed in the previous decade. Assuming this bull run would never end, developers went on creating more and more supply, often resorting to excessive leverage. When prices became unaffordable and the slowdown hit the sector, developers found themselves sitting on huge inventories of unsold flats. And the worst may not be over yet. We highly recommend you to read Vivek Kaul's Real Estate: The (In)Complete Guide to know more about what's really happening in the Indian property markets.
A bubble in the Indian ecommerce start-up space?
Most of the Indian ecommerce businesses are running into huge losses. However, their valuations are hitting stratospheric levels.
Global venture capital (VC) and private equity (PE) firms have poured huge funds into Indian ecommerce start-ups. And what's intriguing is that these firms are completely fine with e-commerce companies running into losses as long as they are growing at a sizzling pace.
This dichotomy between running businesses at losses and premium valuations raise worries of a likely bubble in Indian start-ups.
Avoiding the bubble trap
Bubbles are not always easy to spot. They are born out of optimism and over time escalate into euphoria. During such times the overall market enthusiasm may be so high that you may be tempted to believe that the high valuations are probably justified.
An even bigger challenge is timing a bubble burst. It would be foolish to hope that you will exit a bubble at its peak.
So, what to do? Follow the good old value investing principles. Simply don't go where there is overoptimism and the stock price action does not match the underlying fundamentals. A promise too far into the future is probably worth letting go.
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