Bank of America says investors are well on their way to investing more money in global stocks this year than in all of the previous two decades combined in what some have dubbed the latest signal of a spectacular bubble.
The U.S. bank said inflows into global equities in 2021 at current prices will exceed $ 1 trillion.
The staggering statistic comes against the backdrop of ultra-loose monetary policy, with developed markets sometimes exuding an eerie calm despite the threat of coronavirus variants disrupting economic recovery. The ongoing bull run this year has also weathered rising inflation fears, growing supply chain bottlenecks, and widespread Chinese regulatory intervention as the expansion of US bond purchase programs draws nearer.
“That’s the kind of thing that worries you because stock markets are always most dangerous when it looks the easiest to make money,” said Russ Mold, investment director of AJ Bell. “Episodes like this – some would call them bubbles – rarely end well, but the hard part is figuring out what could provide the pen necessary to burst the bubble.”
However, Michel Perera, chief investment officer at Canaccord Genuity Wealth Management, was quick to downplay the importance of the $ 1 trillion figure, saying it also reflected the unattractiveness of bonds.
‘[It’s] just because there have been inflows into bonds in the past 20 years, with most years negative for equity flows. Therefore, in our opinion, the comparison is not meaningful, ”he said.
Equity markets have continued to move higher this year, with the S&P 500 up the largest portion of 20% year-to-date and a short-lived spring stumble for tech stocks now looking like a slip.
Bond yields have also distorted the predictions that they made can only rise in response to the economic recovery and mounting inflationary pressures that prolonged a three-decade bull market.
This dynamic has perpetuated the feeling that ‘There is no alternative“But fund managers remain crammed with stocks even as valuations steepen.
Mold said that the policy options of developed governments and central banks are severely constrained given the weight of the debt borrowed during the pandemic, a loss of confidence in their ability to control inflation could end the bull run.
“Higher interest rates and a payout of [quantitative easing] would be logical candidates as a surge in inflation is the trigger for a reversal of central bank policy, but with global debt soaring, there is little scope for over-tightening, ”he said.
“So maybe the trigger will be a loss of confidence in the narrative that the central banks are in control and are getting the markets back,” although it might as well be an unexpected shock from outside, as events in early 2020 showed. ‘
At the Federal Reserve’s Jackson Hole Symposium late last month, Chairman Jay Powell attempted to reassure investors that the US Federal Reserve would gradually reduce purchases of US Treasuries and that interest rates would remain at lows for some time to come. Given that yields have barely moved since then, there are indications that the market is still buying this line so far.
Capital inflows in 2021 will exceed the last two decades combined