Advertisement
Macroscope | Stock markets cannot be the only sun at the centre of the economic universe
- Central banks have been complicit in keeping stock markets revved up and feeding asset bubbles, but with monetary policy near exhausted, fiscal stimulus will have to take over. Expect an end to the bull run
Reading Time:3 minutes
Why you can trust SCMP
Stock markets, in the United States especially, have become bubbles that refuse to burst or liquidity lakes that refuse to drain even as vitality leaks from the global economy. What is with this death-defying quality that many equity (and bond) markets appear to have taken on?
Analysts are generally agreed that equity valuations are “stretched”. Some stocks in the S&P 500 index are trading at near double their historic price-to-earnings multiple while corporate earnings in the US and elsewhere are declining at an accelerating pace.
“Equity markets appear to be overvalued in Japan and the United States,” the International Monetary Fund (IMF) noted last week in its latest Global Financial Stability Report. This is based on fair value, which represents the estimated worth of assets and liabilities on a company’s books rather than on market value.
Advertisement
The IMF also noted that while US equity prices have increased, “fundamentals-based valuations have declined”. Germany is also among the “overvalued” equity markets while emerging markets are generally closer to fair value. The most inflated stock indices continue to cling to near-historic highs.
Can it be that they perceive something on the horizon that most of us are unable to see – an early end to the US-China trade war perhaps, or a smooth and relatively painless Brexit?
Neither of these felicitous outcomes is possible. Even if trade wars end tomorrow, the hit to business confidence and investment will be slow to heal. And even if Brexit requires no more than a polite handshake to accomplish, the parting will do lasting damage to the United Kingdom and European Union economies.
Advertisement
Select Voice
Choose your listening speed
Get through articles 2x faster
1.25x
250 WPM
Slow
Average
Fast
1.25x