Chart of the week: The biotech bubble
The Nasdaq Biotechnology index has risen almost sixfold in the past ten year. In the past five, it has quadrupled.
"We are not in a biotech bubble, period," insists David Seaburg of asset manager Cowen & Co. But it's getting harder to share his faith. In the past ten years, the Nasdaq Biotechnology index has risen almost sixfold; in the past five, it has quadrupled. It's reminiscent of the 1990s tech bubble.
Around 75% of firms in the index have no profits, and just five account for over 80% of the whole sector's earnings, says Fidelity's Tom Stevenson in The Sunday Telegraph. This is "fertile ground" for market bubbles.
"Take a plausible growth story, sprinkle with six years of emergency-level interest rates and don't be surprised when strange things happen." Valuations certainly look stretched the index is on an eye-watering price/earnings (p/e) ratio of 425, and a 2016 p/e of 34. Stevenson warns that rallies driven by momentum rather than fundamentals are vulnerable to sudden and nasty collapses.
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