Will a headlong plunge for   global asset prices occur?

Many investors are wary of a headlong plunge for    asset prices

The fact that inflation has risen so sharply only seems to have put the market on even greater notice. The big test will come when the Fed lays out its tapering plans, presumably later this year. However, we still contend that this tapering process will not cause undue harm to asset prices, provided inflation does not become too problematic.

We’ve laid out a number of reasons why we think this tapering process will go much more smoothly than last time, said Steve Barrow, Head of Standard Bank G10 Strategy, adding, these include the fact that the Fed, and others, have probably learned the lessons of last time. In addition, those central banks that have already signalled tapering, such as the Bank of Canada and the Reserve Bank of Australia have not seen significant fallout in their domestic markets. Today, we thought it worth mentioning another factor    that leaves us reasonably calm about the situation; fiscal policy. We should not forget that fighting a pandemic is like fighting a war. Individuals and businesses need income support and replacement during this time, often in the form of direct payments like furlough schemes or    the checks that the US government sent to all lowerincome households. It means that fiscal resources have been used in the main to tide the global economy over through the pandemic, not monetary policy.

Of course, monetary easing can be a help if liquidity problems arise and this might have been the case over the past 18 months. But monetary easing can’t, for    instance, lift demand if individuals are unable go out to restaurants, theatres etc to spend any borrowed cash. And besides, in a pandemic, individuals want to bolster savings, not splurge on goods and services. It means that the situation now is unlike the global financial crisis in 2007-2008 when it was monetary policy that did most of the heavy lifting. And, another point to remember is that, for    many central banks, the scope to ease policy during the pandemic was limit      ed anyway as policy rates were stuck at, or    close to, the lower bound. In theory, at least, this would seem to suggest that withdrawing monetary support now should not be such a big deal, at least compared to the aftermath of the financial crisis.

However, there are a few caveats here. For    one, fiscal policy was undoubtedly eased during the global financial crisis and many actually blame the quick reversal of easing by many governments as part of the reason why in the post- global financial crisis, global economy struggled to fire. In short, fiscal policy was still important a decade, or    more, ago, even if monetary policy bore the brunt of the support. This leads on to the second issue, which is whether governments will be so quick to pull fiscal support in the wake of the pandemic as they were after the global financial crisis. If they are too hasty it could undermine the recovery and hit asset prices, even if monetary accommodation remains very expansive.

Fortunately, it seems to us that governments have learned the lessons. If we look at the US and euro zone, for    instance, we see that temporary fiscal support is being bolstered by long-term fiscal spending, such as President Biden’s infrastructure plans, or    the EU’s EUR750bn Recovery and Resilience Facility. As a result of these sort of things, the outlook seems to be for    fiscal policy to remain more supportive in the wake of the pandemic than it was after the global financial crisis. Another word of caution is that the greater persistence of high government debt could make financial markets extremely vulnerable if central banks have to push policy rates up much faster than anticipated. Hence, why the outlook for    inflation is so important. As a result, investors will have to walk a bit of a tightrope, but the Standard Bank sees the odd stumble, not a headlong plunge for    asset prices.