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Tobias Adrian, Financial Counselor and Director of the Monetary and Capital Markets Department, presents the Global Financial Stability Report at the International Monetary Fund (IMF) during the 2024 Spring Meetings of the International Monetary Fund (IMF) and the World Bank Group in Washington, D.C. Press conference, United States, April 16, 2024.
Anadolu | Anadolu | Getty Images
The director of the International Monetary Fund’s Monetary and Capital Markets Department said on Tuesday that high corporate valuations could pose a significant risk to financial stability as market optimism diverges from fundamentals.
Financial markets have been strong for much of this year, buoyed by falling inflation and hopes of interest rate cuts. But Tobias Adrian said this “optimism” has pushed company valuations to a point where they may be vulnerable to economic shocks.
“We do have concerns that valuations are getting quite high in some areas,” Adrian told CNBC’s Karen Tso on Tuesday.
“Last year it was tech stocks that led the way, but right now, we’re really seeing valuations rising across the board. There’s always the question, if a negative shock hits, how much of a correction will we see in valuations? Pricing, “He said.
Speaking on the sidelines of the International Monetary Fund’s spring meetings in Washington, Adrian said credit markets were an area of particular concern.
“I would point to the credit markets, although the fundamentals for borrowers are deteriorating, spreads remain very tight, at least in some areas,” he said.
“Even riskier borrowers can issue new debt at very favorable prices,” he added.
real estate risk
The IMF’s financing concerns also extend to the real estate market, mainly commercial real estate, which Adrian said has become “somewhat concerning.”
He said small and mid-sized lenders may be particularly vulnerable to the commercial real estate shock as the industry comes under pressure from the shift to remote working and online shopping.
“There is a real link between the exposure of some banks, especially small and medium-sized banks, to commercial real estate, and the financing base of commercial real estate is often fragile. To some extent, the exposure to commercial real estate and the two combine.
The International Monetary Fund released its World Economic Outlook on Tuesday, which included It slightly raised its global growth forecast, saying the economy had proven “astonishingly resilient”.
The global economic growth rate in 2024 is currently estimated to be 3.2%, but it is pointed out that downside risks still exist, including the increasingly uncertain outlook for inflation and interest rates.
Federal Reserve Chairman Jerome Powell said on Tuesday that the U.S. economy has yet to see inflation return to target levels, raising the possibility that the Fed will cut interest rates in the short term.
“We do see persistent risks for inflation. Some of that has materialized, but of course we may see more surprises,” Adrian said.
“We (cite) risks broadly balanced globally. But in some countries there’s a little bit more upside and in other countries there’s a bit more downside. So interest rate risk is certainly a key factor that we’re looking at,” he added.
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