Analysis: stimulus-boosted stocks are threatened as warning signals flash red


LONDON, Sept. 9 (Reuters) – Dizzying valuations and signs that the flood of cheap cash flowing into financial markets may abate suggest the record stock run is about to hit buffers.

Banks such as BofA, Morgan Stanley, Citi and Credit Suisse have asked their clients this week to reduce their exposure to equities. Some predict a sharp drop in prices.

Morgan Stanley is cautious about US stocks and high growth market segments that are very sensitive to rising interest rates, especially since September is a month when stocks generally tend to underperform.

Another possible warning sign is that the equity risk premium – the extra return investors receive for holding stocks over risk-free government bonds – has turned negative for the first time since 2002, noted Thursday. the consulting firm BCA Research.

This week has already seen signs of nervousness, with the MSCI World Stock Index down 1% from Tuesday’s record high. (.MIWD00000PUS)

The index nearly doubled from the March 2020 lows reached when pandemic hysteria sparked an asset sell-off. The gains were oiled by sweeping stimulus from central banks as well as governments, while economic growth and corporate profits recovered faster than expected.

Now the economic recovery may falter – as data from the US and China suggests – as bond yields may come under upward pressure from rising inflation and policymakers are beginning to withdraw from the pandemic-era stimulus measures.

The European Central Bank took a small step towards reducing bond purchases on Thursday, following Tuesday’s decision by the Reserve Bank of Australia to stick to its reduction schedule. Read more

Citi’s global markets strategist Matt King said his biggest concern was that the flow of public and private credit creation was about to turn negative, an important moment for markets riding waves of good liquidity. Marlet.

Reducing private sector credit creation – which includes corporate and household debt – would increase the market’s dependence on central banks as “marginal sources of global liquidity”, as would policy makers. take their foot off the pedal.

“It usually takes a positive delta (difference) to keep the markets recovering – and the immediate outlook for credit and Covid deltas looks extremely negative,” he said.

“We cannot find any occasion where all of the major components of the global credit boost have turned negative and there hasn’t been a massive sell-off somewhere,” he added.

map of the city

BofA strategist Savita Subramanian noted paint maker PPG (PPG.N) – among companies whose fortunes are closely tied to the health of the economy – has just dropped its profit forecast for 2021 due to supply chain disruptions.

Subramanian has a late 2021 target for the S&P 500 (.SPX) of 4,250.6% below current levels. She predicts that the index will only increase by 2% from now on by the end of 2022.

“The Canaries chirp,” she wrote in a research note, adding that her valuation model implies that the S&P 500’s annual returns will average -0.8% for the next decade, the first negative forecast since the 1999 tech bubble.

“It may not end now. But when it does, it might end badly.”

A put-call ratio on U.S. stocks indicates investors are more bearish than at any time in 2021.

stock valuations

Others don’t believe a market correction is imminent, saying fears of a price spike are overblown.

They point out that the forces fueling the rally – low yields and cash-strapped investors – are intact. Small bettors also inject money. JPMorgan estimates that record-breaking equity fund flows of nearly $ 700 billion since the start of the year are dominated by retail investors.

Regarding the risk of market liquidation, Barclays analysts attribute the “taper tantrum” of 2013 when markets fell to poor communication from the Fed, and say policymakers have since improved the way they telegraph financial statements. policy changes.

They point out that by the time the policy tightening actually began, the markets had stabilized.

Editing by Sujata Rao and Jane Merriman

Our standards: Thomson Reuters Trust Principles.

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