Stock Markets and Prospects for Global Economy

  • 12 May 2013

The global financial markets recently reached new highs not witnessed since the 2008 levels. Stock indices hit record levels, with Japan’s stock index Nikkei reaching five-and-a-half year highs. European markets also reached similar levels followed closely by US bourses. This development is significant for both the stock markets and the global economy, as stock exchanges have bounced back after a prolonged slump.

However, the factors that have led to this spectacular spike point to dangers that lie ahead. For example, one of the main reasons for the rise in stock markets is the excess liquidity pumped in by central banks of some major economies in order to stimulate growth.

Other reasons include financial markets other than stocks not generating returns and sectors of the real economy not providing safe and secure investment opportunities. The volatility in the commodities sector, the forex and gold markets, has also driven investors away. Money markets have also been spooked by major currency wars, with countries engaging in a race to devalue their currencies to boost their exports. After a long bull run, fears of a gold market bubble have also increased. Other commodity markets remain extremely fragile as their demand is linked to instability in the real economy.

Therefore, current performance of the international stock markets should be taken with extreme caution. The global economy is passing through an extraordinary phase wherein the stock markets have become the sole draw for capital-intensive investors and the excessive liquidity generated by governments. According to Standard & Poor’s, despite the recent gains made by the stock markets there are ample opportunities available in other sectors for higher returns. Though stocks remain the best bet for investors, analysts wonder for how long will this trend continue. In other words, how far can stock markets take all this liquidity?

In the event of major economies failing to achieve real economic growth and in the absence of other investment opportunities, a bubble in the stock markets cannot be discounted.