A “sense of complacency” is permeating markets as investors, betting on continued accommodative monetary policy, are stretching asset prices and risking a sudden market correction, the IMF warned on Wednesday.
Stretched asset valuations in some areas are largely contingent on government lifelines. Policymakers should be prepared for the risk of a market correction, which could worsen financial vulnerabilities that have so far remained at bay, such as rising corporate debt and weakness in nonbanking financial institutions, the IMF said.
“We do certainly detect stretched valuations in some sectors and some asset classes — in credit, and some riskier segments of credit, in many bond markets and of course in equity markets — it is an environment that is stretched to some degree, but easy financial conditions are an intended outcome of the easing of monetary policy,” Tobias Adrian, director of the IMF’s monetary and capital markets department, said in an interview.