The disparity of the financial markets

The disparity continues between economic reality and the financial markets…

Since the economic crisis triggered by the coronavirus began, with the sharp falls in the financial markets in March, we have witnessed a very significant recovery in the most efficient and flexible geographies, as is the case of the United States, Britain and Switzerland.

This recovery has not occurred with the same strength in weaker geographies or those with greater structural problems, as is the case in many emerging economies or even some European ones.

The reality is that this substantial improvement in the world’s most important financial markets contrasts significantly with the economic reality of their economies. Economic expectations have improved substantially, but actual economic data remains very depressed.

…leading to an unstable situation…

The dichotomy between some financial markets discounting a strong and rapid economic recovery while economic data are still very depressed does not appear to be a sustainable situation in the medium and long term.

During the upcoming months, we should see a convergence between the two. Without knowing with certainty how that divergence will be resolved, it is most likely that there will be an adjustment either in the financial market valuations or in the published data on economic activity.

A clear example can be found in the yield offered by the 10-year U.S. Treasury bond and the country’s economic activity. The yield offered by the bond is 0.65% per year at the time of publishing this article, although after a strong rebound in the last two months, the economic expectations of businesses suggest that it should be close to 2.4%.

…which could lead to strong volatility…

Investors are currently in a confusing situation, which is reflected by an apparent calm in the financial markets. But this status quo is very fragile by nature and could quickly lead to price adjustments in a new economic scenario.

Financial markets are very fast and efficient in this respect, as are investment flows, so it is most likely that we will witness new volatility scenarios in the coming months.

…and, with it, significant investment opportunities.

The volatility of financial markets is excellent news for active investors, particularly in an environment where interest rates are zero or negative in all the currencies of developed economies and both financial and non-financial assets lack structural value.

At BBVA in Switzerland, we monitor this situation on an ongoing basis and are ready to take advantage of the opportunities that will almost certainly present themselves in the near future.

 

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