Our BlackRock Macro GPS suggests that economists remain too pessimistic on the growth outlook for major economies in the months ahead. This comes against a backdrop of tepid risk appetite, according to gauges we introduce this month in our latest Global Macro Outlook, Climbing the wall of money.
We believe upgrades to growth forecasts and greater clarity on the policy agenda of US President-elect Donald Trump could help stir more investor hunger for risk.
- Structural forces – ageing societies, weak productivity growth, persistent increases in savings – have created a low interest rate environment and pushed central banks towards loose monetary policy including asset purchases. One consequence: a build-up of money (physical currency and bank deposits) in the financial system.
- This so-called ‘wall of money’ was aimed at offsetting the post-crisis chill in risk taking. We find that by looking at some gauges of asset values relative to cash or perceived safe assets, risk appetite has improved but is well off peaks reached at the height of the dot-com bubble and early in the 2007-08 financial crisis. See the chart below.
- Our work suggests that current asset valuations do not imply the ‘irrational exuberance’ associated with recent bubbles as much as a growing realisation that interest rates will not climb back to higher historical levels.
- We see scope for investor optimism to lift equities and other risk assets, and see a mild rise in bond yields. But we don’t expect renewed bouts of euphoria. We believe the structural factors at play should keep any yield rises contained.
How money morphs
Gauges for US financial multiplier and risk ration, 1955-2016
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