“Complacent” financial markets buoyed by the rollout of Covid vaccines are at risk of a sudden collapse, the International Monetary Fund has warned.
Prices have surged as the vaccines boost expectations of a global recovery “despite rising Covid-19 cases and persistent uncertainties surrounding the economic outlook”, the international lender’s latest financial stability update said.
The warning comes amid a dash for shares, corporate debt and crypto-assets such as Bitcoin, which soared above $40,000 earlier this month. World stock markets have added $33 trillion in value since lows last March.
IMF directors Tobias Adrian and Fabio Natalucci said the massive policy stimulus poured on by central banks to cope with the pandemic had encouraged the buying spree as investors hunt for returns.
They warned: “With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets; coupled with apparent uniform investor views, this raises the risk of a market correction or ‘repricing’. A sharp, sudden asset-price correction – for example, as a result of a persistent increase in interest rates – would cause a tightening of financial conditions.”
Policymakers faced a “trade-off” and a “difficult dilemma” between continuing to support the recovery and addressing issues such as soaring corporate debt and the vulnerabilities of investment funds to the “dash for cash” in the early stages of the pandemic, the IMF directors said.
“They need to keep financial conditions easy to provide a bridge to vaccines and to the economic recovery. But they also need to safeguard the financial system against unintended consequences of their policies,” the authors wrote.
Warnings of over-exuberance have proliferated this year, with Jeremy Grantham, the veteran investor at fund manager GMO, warning of “a fully-fledged epic bubble”.
The IMF has also cautioned that new variants of the virus and stalling rollouts would hamper recovery in the UK and eurozone despite lifting its global growth forecast to 5.5pc.
Britain’s economy is predicted to grow by 4.5pc this year – well below its October forecast of 5.9pc. The organisation predicts that global output lost to the pandemic will reach a cumulative $22 trillion (£15.8 trillion) by 2025.