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
Sequoia Financial Group has announced it is selling off its Informed Investor subsidiary which it acquired in April 2022.
Wealth Data has examined which advice business model has seen the most growth since the start of the year including those that offer holistic advice.
Research conducted by Elixir Consulting and Lonsec has quantified the efficiency gains of using managed accounts in financial advice practices in hours per week saved.
With only one-quarter of advice practices actively seeking feedback from clients, the Financial Advice Association Australia has emphasised why this is a critical tool for client retention.