The Global Financial Stability Report’s January forecast stated that the approval and rollout of vaccines have boosted expectations of a global recovery and lifted risk asset prices, despite rising COVID-19 cases and persistent uncertainties surrounding the economic outlook.
“The roll out of covid-19 vaccines has boosted expectations of a global economic recovery in 2021 and has pushed the prices of risk assets even higher. Financial markets have shrugged off the most recent softening in economic activity, betting that continued policy support will offset any possible near-term disappointment and provide a bridge to the future. The market rally and the economic recovery remain predicated on continued monetary and fiscal policy support. The inequitable distribution of vaccines risks exacerbating financial vulnerabilities, especially for frontier market economies,” said Tobias Adrian, Director of the Monetary and Capital Markets Department at the International Monetary Fund
Adrian added that even though policy accommodation has mitigated liquidity strains so far, solvency pressures may resurface soon, especially in segments of credit markets and sectors hit hard by the pandemic.
“The much debated disconnect between exuberant financial markets and the evolution of the economy appears to persist. That raises the specter of a possible sharp, sudden repricing of risk by investors. Stretched valuations and risk asset markets have raised concerns among some investors, they have pointed to misalignments between equity market prices and the valuations implied by economic fundamentals, especially when considering the huge uncertainties about the economic outlook. Other market participants, however, note that current market valuations can be justified after accounting for the lower for longer interest rate environment. They point to expectations of very low interest rates for the foreseeable future and to upward revisions in earnings expectations since the vaccine announcement as justification for the equity market rally. Policy accommodation has mitigated liquidity strain so far. But solvency pressures may resurface in the near future, especially in riskier segments of credit markets and sectors that have been hard hit by the epidemic,” said Adrian.
He also added that policy makers should continue to make support available until a sustainable recovery from the pandemic is achieved.
“Policymakers should continue to provide support until a sustainable recovery takes hold, because under-delivery may jeopardize the healing of the global economy. Policymakers should safeguard the progress made so far. They should build on the rollout of vaccines to return to sustainable growth by preserving monetary policy accommodation, ensuring liquidity support to households and firms, and keeping financial risks at bay. With monetary policy expected to remain accommodative in coming years, policymakers should address rising vulnerabilities to avoid putting growth at risk in the medium term. Support by the IMF and other financial institutions will remain crucial for emerging markets and developing economies, especially further,” said Adrian.