BNP Paribas AM: The tide is high

ELEVATED PRICES FOR ASSETS AND A COMPRESSION OF RISK SPREADS

Global stock prices, as measured by the MSCI World index, have risen every month for the last 13 months (up to and including November 2017). Over the same period the US S&P 500 index has also risen for 13 consecutive months. This is an almost unprecedented bull run; in the last 70 years, the only comparable runs of performance were sequences of 11 consecutive monthly rises during the 1950s.2  Yields of high-yield bonds and leveraged loans fell to cyclical lows during the course of 2017. Emerging market assets, after a number of years of underperformance, put in a barnstorming run only corrected by a US dollar rally. On 15 November, Leonardo da Vinci’s Salvator Mundi became the most expensive painting ever sold when it was auctioned at USD 400 million. The list goes on, but in short, risk assets undoubtedly have the wind in their sails.

THE TIDE OF LIQUIDITY IS NOT SET TO RECEDE ANYTIME SOON

As the graph on the next page shows, G3 central banks now hold around USD 14 trillion of assets, compared to USD 3 trillion before the 2008 crisis. And the tide of liquidity is not set to recede anytime soon: aggregate G3 central bank balance sheets are forecast to keep increasing until at least the third quarter of 2018.

Over the course of 2018, a reduction in the amount of securities held by the US Federal Reserve should be counterbalanced by growth in the European Central Bank and Bank of Japan’s portfolios, albeit at a slower pace. So, expansion in aggregate G3 central bank balance sheets should continue to effectively remove interest-rate risk and thus lower the risk of a ‘tantrum’ in sovereign debt markets.

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