Global stock markets are dangerously overvalued because investors are gambling that central banks will come to their rescue in another crisis, the International Monetary Fund warned.
Markets have “decoupled” from economic fundamentals and could threaten the recovery if they readjust, the fund added. Equity markets have recovered by about 25 per cent from their lows in March at a time when the economic outlook has darkened.
The IMF’s growth forecasts for global gross domestic product were revised down from a 3 per cent recession to 4.9 per cent between April and June.
A stock market shock could make the recovery “even more challenging”, the fund said yesterday.
With infections rising in the US and Europe as lockdowns have been eased, this week there was a market sell-off because a second wave is feared.
“A repricing could result in a sharp tightening in financial conditions, constraining the flow of credit to the economy. Financial stress could worsen an already unprecedented recession,” the fund said in an update to its global financial stability report.
“Investors are apparently betting on continued and unprecedented support by central banks.”
That assumption, known as moral hazard, has “created a divergence between the pricing of risk in financial markets and economic prospects” and the difference is now “near historic highs” across advanced economies like the US and the UK.
Central banks of the leading ten nations have bought $6 trillion of assets since January, more than double the scale of intervention in the two years after the US Federal Reserve began quantitative easing in late 2007. The intervention has lifted share prices to 85 per cent of peak January levels.
“The bullish mood among investors is predicated on strong policy support amid huge uncertainties about the extent and speed of the economic recovery. Markets appear to be expecting a quick V-shaped rebound in activity,” the fund said.
However, a swift correction could destabilise the global economy. The trigger could be a second spike, a deeper recession than expected, a new flare up in trade tensions, or “expectations about the extent of central banks’ support could turn out to be too optimistic, leading investors to reassess their appetite and pricing of risk”.
“Policymakers need to be attentive to possible unintended consequences,” the IMF added.