The day after #13 – How will Central Banks impact the equity markets in the post-Covid world?

December 15, 2020

Interest rates are at an all-time low, and even if inflation eventually picks up, it could take some time. Central banks, the first pillar of the investment cycle, are adjusting and are resolutely accompanying governments in this final battle against deflationary threats, at the risk of losing some of their independence.

The resulting low level of real interest rates boosts risk premiums, supports equities over bonds, and leads to growth stocks being overvalued vs. value stocks. Reducing this excess will be achieved by a rebound in value stocks, which will notably benefit from the steepening of the yield curve in the recovery phase. However, as interest rates will remain low and disruption is now part of our daily reality, it is likely that growth stocks will eventually surprise upwards again in this cycle.

Several risks could disrupt this optimistic reading of the impact of central banks on equities: central bankers’ willingness will be tested at the first signs of inflation. Their communication will have to be particularly pointed. A premature about-face on fiscal accommodation by some governments would also raise doubts in the markets. Finally, a failure of stimulus and reflationary policies remains possible; the low interest rate environment is part of the solution, but is also a symptom.

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