Experts have made a wrong assessment about global liquidity and very soon there could be a freeze up of market activity, believes the chief executive of Swiss bank UBS.
The worst December performance since the Great depressions of 1931 was reported last month by the Dow and S&P 500 equity indices. That was also the largest monthly loss for the indices since February 2009.
Concerns over an economic slowdown and the fears about further tightening of markets by the US Federal to a situation where liquidity could dry up in markets led to the dumping of stocks. From the investors’ point of view, a good liquidity condition allows an investor to quickly sell off an asset at prices of last trading of the stocks.
The convergence of macro and political fears and a growing perception that investors would not be able to move capital as easily as before led to the December sell off, said UBS chief executive officer, Sergio Ermotti, while speaking at a panel discussion at the World Economic Forum in Davos.
“The implied assumption that we hear about liquidity being there, being able to step in and function the levelling out tensions, is the wrong assumption,” he said and added that “liquidity can freeze very easily, like the water in Davos.”
There was an allocation of 24 per cent in cash asset allocation at the end of the fourth quarter in 2018 among its US investors, which was a historic high, Ermotti said, because investors decided to sell off their assets and invest less in the markets.
“This is not liquidity that is there for reinvestment. This is there because people fear that things will go wrong,” he warned.
Many of the bigger investors of the world are now managing money for others, said the Swiss banker, and added that unlike banks, those large investors might not stand by willing and be able to trade an asset so that there is smooth running of the market.
A lack of liquidity is “what we all worry about”, said Mary Callahan Erdoes, J.P. Morgan’s asset & wealth management chief executive who was also present at the panel.
Now there exist strange pricing levels because of an additional $11 trillion worth of assets has been put into the global financial system since 2008, said Callahan Erdoes at Davos. For example, 85 per cent of the Italian high yield market traded below the yield of U.S. treasuries in 2017, noted the U.S. banker.
Under optimum conditions, the yield from the U.S. treasuries would typically be lower compared to the Italian yield because the US treasuries are typically believed to be safer bets for investors.
According to the JP Morgan executive, there is need of providing an immediate cure to these market anomalies at the time of redeployment of capital eventually, he however also warned that a lack of market makers and a gap in liquidity could also been viewed as a danger by some people.
(Adapted from CNBC.com)