Markets ride easy money wave, experts caution against asset price bubbles

The V-shaped rebound has been underpinned by gush of liquidity flooding the global financial system thanks to the balance sheet expansion, particularly by the central banks of G4
Equity markets across the world are having a dream run, thanks to aggressive stimulus measures by central banks.

Most global indices have managed to overcome deep losses suffered in March, amid the Covid-19 pandemic, to trade in the green on a year-to-date (YTD) basis. On Wednesday, the benchmark Nifty closed at 11,133 — the index is currently just 8.5 per cent down on YTD basis and 10 per cent shy of a new all-time high.

It managed to make giant strides despite the unprecedented economic shock following the lockdown. The Indian benchmarks have rebounded 47 per cent from their March lows, having gained 27 per cent in the past two months. The V-shaped rebound has been aided by a gush of liquidity flooding the global financial system, thanks to balance sheet expansion — especially by central banks of the G4 bloc.

Concerns have surfaced regarding further expansion in the US Fed’s B/S, following a rapid ramp-up this year (which had helped shore up markets). However, the easy money trade could sustain well into the next year, predict experts. The European Union announced a $850-billion recovery fund on Tuesday. Other G4 peers including the Fed, Bank of Japan (BoJ), and Bank of England (BoE), are expected to follow suit.

Morgan Stanley has, in a July 15 note, projected G4 central banks to expand their B/S by $12 trillion by end-2021. “G4 central banks have announced aggressive quantitative easing programs. We estimate them to make asset purchase of $12 trillion this easing cycle. Fed alone will make cumulative asset purchases of $6.2 trillion by the end of 2021,” it said.

Experts said money printing would provide a floor to global financial markets and a liquidity boost to developing nations.

“Central banks are clear they will print money for the next two years. As they print money to finance economies, cost of capital will further reduce. Our country will receive more foreign portfolio investment (FPI) and foreign direct investment (FDI) flows to fund economic revival. This will be a 3-year recovery. Markets are discounting economic recovery for the next 3 years,” said Saurabh Mukherjea, founder of Marcellus Investment Managers.

After a record sell-off by FPIs of over $8 billion in March, the YTDinvestment rally has improved significantly. At present, FPI outflows stand at about $2 billion. Experts believe the YTD tally for both foreign flows and equity markets could turn positive on a YTD basis.

“When there is more monetary easing, cash finds its way to the equity markets; it is difficult to establish a direct correlation. But the money indirectly seeps into the system. So, equity prices will remain buoyant,” said U R Bhat, director of Dalton Capital.

Not just G4 but even BRIC nations are expected to announce further fiscal and monetary measures.

“Monetary easing may continue till normalcy is restored. Central banks are contemplating further easing. In India, easing has not been much but compared to our finances, it is still significant. There is no other way — money has to be made available cheaply. This is the only way you can handle the economic consequences of the pandemic,” said Bhat.

While easy money trade will keep equities buoyant, experts have sounded a note of caution regarding asset price bubbles.

“Liquidity always takes markets to a higher place than you logically expect. Institutional participation has taken a back seat. Activity is being led by retail investors, who are enjoying the ride. This is going to reverse, but we don’t know what the catalyst will be,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.

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