Source: SINGAPORE – Reuters
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The International Monetary Fund has warned that stock markets and other high-risk assets may see a second collapse if the outbreak of the Corona virus expands, and overall closures or trade tensions are renewed.
Equity markets fell sharply earlier this year as sentiment was negatively affected by the virus and related closures, but they have risen broadly since the very low levels they recorded on March 23. After falling 34% in no more than 23 trading sessions, the S&P index benefited from the support provided by central banks, and it is currently only 10% away from the highest levels ever.
“A separation has arisen between financial markets and economic prospects,” said a report prepared by Tobias Adrian, director of the fund’s money and money markets department and Fabio Natalucci, deputy director of the department, adding that “this raises the risk of another correction in high-risk asset prices”, as valuations in many Stock and corporate bond markets are “overrated”.
The warning comes a day after the International Monetary Fund cut back its forecasts for the global economy in 2020.
The correction may result from a deeper and longer recession than current expectations, a second wave of the virus, or a re-enforcement of its containment measures. The fund said the widening range of social unrest due to growing economic inequality could also hurt investor confidence.
“We fear that the economy will have scars, meaning that the crisis will extend and deepen more than expected,” Adrian said. “The scars are caused by high levels of unemployment and bankruptcy. These are difficult to fix.”
He wrote that a sharp correction in asset prices could lead to a massive displacement of capital from investment funds, as happened early in the year, which could spark a frantic sale of assets below their real prices.
The Monetary Fund said that the banks entered the crisis armed with high levels of liquidity and capital reserves, but bankruptcies will test the strength of the sector.
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