Why The Global Asset Bubble is Not Yet Ready to Burst
Since the end of the global financial crisis, asset prices have delivered significant growth. For example, in the last eight years the S&P 500 has risen by 140%. Similarly, property prices across the world have generally risen.
The catalyst for asset price growth has been an ultra-loose monetary policy environment. Interest rates in the developed world have fallen to historic lows, while quantitative easing programmes have improved economic performance and caused sentiment among businesses, consumers and investors to improve.
The favourable monetary policy conditions of recent years are showing little sign of coming to a close. In the US, for example, interest rates have risen a couple of times following the end of the monthly asset repurchase programme implemented by the Federal Reserve. However, with inflation remaining stubbornly low, continued interest rate rises seem unlikely, and this could create yet more asset price growth in the US and global economies.
Similarly, in the UK and Eurozone, low interest rates could be set to stay over the medium term. Concerns surrounding Brexit remain high, with negotiations between the UK and EU moving along at a relatively slow speed and there being significant uncertainty as to what will happen from an economic perspective when Brexit takes place. Therefore, policymakers seem unlikely to risk stifling the economic performance of the region and may elect to maintain an accommodative monetary policy in the next few years.
It’s a similar situation in China, where government stimulus has helped its economy to become one of the fastest-growing major economies in the world. With the country transitioning towards a more consumer-focused economy which relies less on infrastructure spending, it seems likely that policymakers will seek to make the move as frictionless as possible.
Benefitting from asset price growth
With the outlook for asset prices being relatively strong, it may be prudent for Foolish investors to seek out high-quality companies trading at fair prices. Certainly, stock markets across the globe are trading close to all-time highs, but there are still likely to be a number of stocks which could offer high growth at a reasonable price.
Certainly, a higher inflation rate looks set to become a reality in future years. Spending levels in the US could increase if Trump’s tax and spending plans come to fruition. This could cause the Federal Reserve to raise interest rates, and this could slow down the rate of asset price growth and dampen economic activity. Similarly, quantitative easing in the Eurozone may come to an end, while in the UK the current high level of inflation may prompt an interest rate rise.
However, these events may be some distance away. In the meantime, investor sentiment remains buoyant and it would not be a major surprise for the S&P 500 and other indices to post new record highs over the medium term.