Post-COVID asset bubbles unlikely to be a concern ‘for the next year or so’
For investors who were around for the global financial crisis (GFC), the support response to the COVID-19 crisis has brought back some distant memories.
As investment manager James Whelan told Stockhead last week, policymakers have “fixed a health crisis with a GFC solution”.
It also means plenty money has flowed back into equities.
By July, there were six ASX small caps which had risen by at least 1,000 per cent from their March 23 lows – a number that would’ve increased over the last three months.
From this point though, it’s not so much what policy makers have done as what they might do in the future.
Is the unprecedented stimulus here to stay? Following a speech from RBA governor Philip Lowe last week, Westpac economist Bill Evans says that now looks likely.
Evans said the speech marked a key turning point in the road ahead, describing it as a “game changer from the perspective of future policy”.
Among the notable changes in Lowe’s message was a ‘whatever it takes’ approach to jobs.
In effect, policy settings will remain ultra-accommodative until the economy gets back to full employment.
With the post-COVID unemployment rate still holding around seven per cent, it follows that markets can expect interest rates to stay lower for longer.
But Evans also highlighted the bank’s changing stance towards how interest rates interact with asset prices.
In particular, that interaction relates to real estate. (Historically, the RBA has been hesitant to put the pedal to the metal on rates for fears of creating a housing bubble).
But it’s also relevant for stocks, where low rate settings have helped tech growth stocks put traditional value stocks on the mat since 2017.
However, these days, “considerations have changed somewhat”, Lowe said.
To the extent low rates help people get jobs, “it will help private sector balance sheets and lessen the number of problem loans.”
As the economy recovers, Evans said the messaging around asset price question will be one of the first to be calibrated as Australia’s economy recovers.
So how long will the taps stay on?
“For now, and the likely next year or so, concerns around monetary policy destabilising asset markets are going to be contained,” Evans said.
And he compared Lowe’s pivot to the landmark speech from US Federal Reserve chairman Jerome Powell in late August, which helped push global markets higher.
With major central banks increasingly committed to running their economies hot in the post-COVID recovery, asset prices may stay well supported.
As evidence of the current sentiment (and liquidity) in ASX markets, no less than nine companies are set to join the ASX boards over the next two weeks.
And in light of recent communication from the RBA, another rate cut is on the cards in the near term.
The central bank doesn’t have much room to move, but most analysts expect another small cut from 0.25 per cent to 0.1pc at its next meeting on November 6.