A never-ending party. Driven by the monetary policies of central banks, stock prices are rising ever higher. A small break on Wednesday April 28, then the announcement by the Fed, the American central bank, of maintaining its accommodative policy, and here they are again towards the summits with the amazing results of the American digital giants, which fell at the end of the week. In France, the CAC 40 is at its highest since 2007. In the United States and Europe, the indices are at historic highs. In a global economy still devastated by the Covid, there is reason to wonder if the evolution of the markets still has the slightest link with the real economy.
The evolution of prices owes a lot to the monetary policies of the European Central Bank (ECB) and the Fed, which create an influx of liquidity in the financial markets. “Central banks free up space in investors’ portfolios by buying debt from governments and companies. The latter then switch to riskier assets, which explains the inflation of stock market values ”, explains Anne-Laure Delatte, CNRS economist attached to the University of Paris-Dauphine.
Another lever of monetary policy, the maintenance of key rates at the lowest level, which causes an abundance of credit. The lack of high-yield investments in the real economy pushes investors to seek profits in the financial markets. The enthusiasm of young Americans for the stock market (read opposite) is the most glaring example. Suddenly, the demand for assets is much higher than the supply: prices are rising.
After a plunge in March 2020, the stock markets returned to their pre-Covid level in four months. By comparison, after the 2008 crisis, it took more than three years to restore prices. Cyclical factors favored this spectacular rise. “The markets are high because they anticipated the end of the crisis, analysis Ludovic Subran, chief economist at Allianz. They knew central banks would act, no matter what, to save them. These incredible levels are also driven by a few stocks: the digital giants and Tesla captured 70% of the gains in the American market last year. “ The tech sector is highly anticipating future profits, which is boosting valuations.
These levels raise questions, however. Spunk of asset management in the American market now retired, Jeremy Grantham sounded the alarm on his blog in January: “One of the biggest bubbles in the history of finance” is about to explode, he said. The bubble means that the exchange price of a security no longer has any relation to the intrinsic value of the asset. The manufacturer Tesla, for example, is valued at more than $ 600 billion, or about 1.5 million per car sold.
“There is a lot of money but few assets, so the markets are concentrated on a few mega companies, analysis Hubert de La Bruslerie, professor of finance at Paris-Dauphine. The valuations of these companies are quite high, but the asset munchies serve as a cushion for a possible market correction. “” Monetary and budgetary policies create a form of anesthesia, adds Ludovic Subran. There is much less room for correction, especially since there is very little risk of sovereign or corporate debt default. ” In other words, the influx of money seems to rule out the possibility of a crash.
However, there is no lack of warning signs of a financial crisis. In April, the New York investment fund Archegos lost more than $ 10 billion to international banks by taking risky positions. The financial services company Greensill is itself put into liquidation, while it ensured the cash needs of some forty large companies in the world …
“The fear index that bitcoin has become is at its highest”, continues Hubert de La Bruslerie. Investors are turning to alternative investments for fear of a crash. “The Spacs, these very fashionable financing vehicles in the American market, worry me, note Anne-Laure Delatte. The idea is to entrust money to an entrepreneur, Xavier Niel for example, who will invest it in what he believes. This gives star investors a lot of financial strength while opening the door to fashion effects that amplify trends. Green assets are another source of concern. Investors love these products, but the tools to distinguish the true green asset from the greenwashing are still confused. “
“The structure of the market is worrying, continues Ludovic Subran. The money is concentrated on a few stocks that look like bubbles and there are new investors, not necessarily very educated, in the market: we do not know how they will react if there is a correction. ” With banks in good financial health, the risk of contagion is limited for the time being. Except that a wave of business failures at the end of the Covid crisis, synonymous with the accumulation of unpaid loans, could be a game-changer.
The lights are red, but the specialists questioned do not share the opinion of the pessimists. For good reason, central banks have not whistled the end of the party and continue, tirelessly, to water the markets. A downside, however, “The ECB does not have the same room for maneuver today to absorb a shock like the Covid. It has limits, particularly in terms of funding from the Member States ”, explains Sylvain Broyer, chief economist for Europe at the Standard & Poor’s rating agency.
The way out is inflation. His announced return to the United States, a consequence of President Joe Biden’s recovery plans, will allow a very gradual reduction in the intervention of the Fed. Inflation erodes debt, and the mountain of accumulated debt becomes sustainable for governments and businesses.
Europe does not have this emergency exit. “The foreseeable absence of inflation, once the summer has passed, does not give the ECB a way out, continues Sylvain Broyer. It is trapped in its 2% inflation target. “ The institution now also has an unofficial but well-integrated objective, that of limiting the interest rate differentials on the debt of member states. It is doomed to maintain its policy to avoid a new debt crisis.
There then remains the Japanese scenario, made up of zero interest rates, debt redemption and the absence of long-term inflation. Japan has a record public deficit with contained interest rates, as its credit structure maintains confidence in its currency. If the ECB wants to be inspired by it, it will have to continue to buy the bonds of the most vulnerable States. The downside is that Europe then risks settling for a long time in a period of weak growth, similar to that experienced in Japan.