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Time to lean against the wind?

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With stock markets almost back at pre-Lehman levels – something we thought unlikely before the year’s end – one question is emerging forcefully: who, for heaven’s sake, is driving the stock market rally?


, Oct 16, 2009

Common wisdom is that it wasn’t the insurers. They have been reducing their public stock market exposure, at least until recently. Nor was it  pension funds or balanced funds that were also reluctant to go back into equities. Private investors missed at least a part of the rally, but started to re-enter the market in the second quarter, as shown by net inflows into equity-linked funds. So who was it? Hedge funds and banks? Hedge funds moved relatively early to take long positions on stock markets. But especially banks have been generating big profits from equity investments and equity trading. They have abundant liquidity from central banks, it is cheap and it is not being absorbed by corporate lending activities, where either the demand is low or the risks are too high.

So, once again, the first part of a post-recession stock market rally is being driven by liquidity and low interest rates. Money market rates and bond yields (especially of shorter duration) are low because central banks have repeatedly committed not to exit from expansionary policies until the economic recovery is stronger and self-sustained. Central bank policy is the link in explaining the seemingly wide gap in expectations on stock markets and bond markets.

 

Dr. Michael Heise

e-mail: michael.heise@allianz.com