A global shift in traditional financial markets dynamics
The returns on equity and bonds traditionally move in opposite directions. Equities become more attractive when economic risks are expected to be low and future profits high. By contrast, bonds are mainly purchased when economic risks are high and investors prefer to fix their cash flows. These fundamental considerations used to be the cornerstone of investment decisions.
Since 2009 (in the United States), 2010 (in Japan) and 2012 (in the euro area), investors have been buying equities and sovereign bonds at the same time (Chart 1). The traditional correlation between bond yields and equity prices has reversed: for the first time, declining bond returns go hand in hand with equity price growth. The market movement of bond yields is consistent with the underlying economic situation. Global growth is fragile and lies below its long-term average. In addition, commodity prices, which are strongly linked to the real economy, have been falling since 2011. Equity prices continue to rise rather than move in parallel with economic growth developments and commodity prices, like they did in preceding periods (Chart 2). Despite the rising equity prices, the equity risk premium is still high compared to other asset classes, e.g. fixed income securities. For this reason equity remains attractive to investors.
Chart 1: A global shift in traditional dynamics between equities and sovereign bonds
Normalised = 1 in January 1998 (January 1999 for the ECB)