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Are equity markets becoming a giant Ponzi scheme?
Around the world, falling interest rates are forcing investors to move their money towards riskier assets, creating a “giant Ponzi scheme”, suggests a fund manager.
Are equity markets becoming a giant Ponzi scheme?
Around the world, falling interest rates are forcing investors to move their money towards riskier assets, creating a “giant Ponzi scheme”, suggests a fund manager.
During a media briefing, Schroders head of fixed income and multi-assets Simon Doyle stated 2019 was “pretty much an interest rate story”.
“One of the key issues at the moment is asset prices. Even the Federal Reserve acknowledged in their words, asset valuations are somewhat elevated, which is quite telling,” Mr Doyle said.
While acknowledging it is too soon to talk about the impact of the coronavirus on markets, Mr Doyle believes it highlights the problems markets have in a low interest environment.
“This is the problem when you don’t have a risk premium in asset prices. It is a bit of a dilemma: [central banks] want asset prices to rise to help transmit their monetary objectives into the economy, but in doing this they have suppressed risk premiums.”
“If things go wrong, whether earnings disappoint or a coronavirus causes a short- or long-term problem for the economy, there’s not a lot of buffer for asset prices to absorb that.”
The fund manager continued to suggest that investors looking for income could pay the price for elevated equity prices.
“The reality is if nothing goes too far wrong in the economy and liquidity keeps being injected in, markets could run up,” the fund manager said.
“But we think that run is not based on particularly solid fundamentals but a belief central banks will bail out investors.
“Bear in mind, that ended pretty painfully in the early 2000s.”
Mr Doyle believes the global economy is at risk if something breaks, such as a recession. The fund manager questions how long will the run last and how can it end without it being a manager disaster for the global economy.
“Central banks keep inflating asset prices. They have cut rates to basically zero and some countries below.
“We were in an environment where we had better value assets and high yields, and we now have incredibly low yields and elevated asset prices, so there’s not a lot of income.”
Mr Doyle concluded: “If you take a really cynical view of it, it’s a giant Ponzi scheme being created and nobody is sure how to get out of it.”
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