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Asset prices are going to be subject to opposing effects. A negative effect: the fall in potential growth and earnings. A positive effect: higher valuation due to the fall in real interest rates. A second positive effect: the highly expansionary monetary policies and liquidity growth. If the sum of the three effects is positive, then there will be a decoupling between asset prices and the real economy (growth, earnings), according to economists at Natixis. 

Key quotes

“Potential growth is lower after a recession for a number of reasons (loss of productive capital; loss of human capital; increased number of zombie firms). This was the case after the subprime crisis. Lower potential growth normally leads to lower earnings per share.”

“Real long-term interest rates are expected to be lower after the crisis than before it, and could even be negative. Under the effect of a further rise in the private savings rate due to precautionary savings after the crisis; an upturn in inflation from its very low level in 2020; central banks’ persistence with policies to control nominal long-term interest rates (yield curve control). These very low real long-term interest rates will drive up asset valuation. We are already seeing this with PERs in the equity market.”

“Central banks are creating a considerable quantity of money in 2020 to monetise fiscal deficits and keep companies solvent. This central bank policy will support asset prices via two mechanisms. Moral hazard: investors feel insured by central banks against the risk of a fall in asset prices. Portfolio rebalancing: investors will rebalance the structure of their portfolios by using the excess liquidity to buy other asset classes.”