Thursday, 20 June 2024
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Global markets are at risk due to distressingly high rates

  • International equities are still hovering around all-time highs, and demand for debt issued by the riskiest businesses is strong.
  • Large investors are debating whether to raise or lower the benchmark interest rate that is used to assess financial assets.
  • Global stock markets saw record highs in March and are up roughly 4% so far this year.

An unpleasant wake-up call for the financial markets is being threatened by the growing fear that interest rates in the major economies will stay relatively high. International equities are still hovering around all-time highs, and demand for debt issued by the riskiest businesses is strong.

Nonetheless, minimal monetary easing is currently anticipated by economists and asset managers, particularly from the US Federal Reserve given the surprisingly high rate of inflation.

Global markets

Large investors are debating whether to raise or lower the benchmark interest rate that is used to assess financial assets, but they are also delaying their long-term holdings. As a result, stock market volatility is currently at a six-month top. “A valuation drag from higher for longer rates” will affect global markets, according to BlackRock Investment Institute senior investment analyst Ann Katrin-Petersen.

The biggest asset management in Europe, Amundi, predicted in a letter on Monday that US stocks will underperform internationally over the next ten years. It anticipates an outperformance of the debt and equity of businesses in developing countries including mineral-rich Chile and Indonesia, as well as fast-growing India.

The Federal Reserve’s benchmark rate may decline more gradually than the markets currently believe, according to a report released by the IMF on Tuesday.

According to Petersen of BlackRock, U.S. rates will be nearly 4% over the next five years, while the euro zone’s rates will be roughly 2%. Global stock markets saw record highs in March and are up roughly 4% so far this year.

With predictions that the Fed will cut rates from a 23-year high of 5.25% to 5%, an index of global junk bonds issued by indebted corporations is at its highest point since 2021, maintaining the ebullient state of global borrowing and investment conditions.

According to estimates from accounting firm EY, a one percentage point increase in this metric lowers the present value of companies’ future earnings by 10%. Investors told me that stock prices, especially US ones, are excessively high. Based on long-term rate estimates, Wall Street’s S&P 500 index, which affects equity markets globally, is priced 32% above fair value.

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