Persistent equities market over-valuation due to the wider-adoption of indexing?
This makes sense, and there is nothing wrong with that.
Equities comes with 2 risks: market risk and single-company risk.
Indexing totally removes the second risk, leaving only market risk.
So of course valuations should move up, because risk is reduced, but returns are the same.
In a decade or two, when all dumb money has moved into dumb-beta index-funds, the stock market will become a “long-term-bond” with low volatility and low returns.
This does not apply yo emerging markets such as China, where there are virtually no index funds, and investors are forced onto the roller coaster of single stocks. No wonder so many Chinese are desperate to get their money out of the country !!!
Marked as spam