Markets developing a liquidity injection dependency: van Eyk
Global market are working in new ways, with periods of prosperity interspersed with asset bubbles instead of the traditional economic cycle of boom periods followed by a bust, according to van Eyk’s head of research Suzanne Tavill.
Partly as a result of US Federal Reserve liquidity injections, Tavill said the market is far less wary of shocks than in the past.
After analysing the timing of past liquidity injections, she said the Long-Term Capital Management hedge fund of Salomon Brothers, the 1998-9 Russian debt crisis, Y2K and 9/11 in 2001 heralded a series of global asset bubbles.
“In a way, this has resulted in a new form of cycle — periods of prosperity followed by asset bubbles, in contrast to the traditional economic concept of cycles of prosperity followed by recession.
“Bubbles are rotating through subgroups of asset classes such as emerging markets, private equity, property and commodities,” Tavill said.
She pointed out that while the bubbles in equities and property result in positive wealth effects, which feed back into the real economy driving economic growth, commodities could have a net negative wealth impact.
Tavill said risk is being mispriced because the financial market “has become addicted to the Fed’s liquidity injections”.
“Shocks and crises are not feared as they were. This is evident in substantially depressed risk premiums across and within bonds and equities,” she said.
According to Tavill, the asset bubble is rotating, seeking undervalued assets, with risk mispricing potentially having a dramatic impact on prices across asset classes, especially those traditionally riskier sub-classes.
Recommended for you
Licensee Centrepoint Alliance has completed the acquisition of Brighter Super’s annual review service advice book, via Financial Advice Matters.
ASIC has launched court proceedings against the responsible entity of three managed investment schemes with around 600 retail investors.
There is a gap in the market for Australian advisers to help individuals with succession planning as the country has been noted by Capital Group for being overly “hands off” around inheritances.
ASIC has cancelled the AFSL of an advice firm associated with Shield and First Guardian collapses, and permanently banned its responsible manager.
