Stock market bubble bursting 'poses biggest risk to global economy'
A financial bubble bursting poses the biggest threat to the world over the next five years, top business and political leaders have warned, as investors raise the alarm over soaring stock valuations.
Economic dangers, including debt crises, commodity shocks and price instability, dominated the top risks posed over the medium term in the World Economic Forum’s annual Global Risks Report.
The survey ahead of the virtual Davos event next week found that an asset price bubble is the biggest risk in the next three to five years, amid fears the recent stock price rally has stretched valuations too far - particularly in the US.
Infectious diseases are deemed the largest short-term risk, and weapons of mass destruction are the greatest long-term worry. The WEF survey took responses from "business, government, civil society and thought leaders".
It came as a survey of investors by Deutsche Bank found that bitcoin and US tech stocks are seen as the biggest bubble risks. On a scale of 0 to 10 between 'no bubble' and 'extreme bubble', US tech equities got an average score of 7.9 compared to 8.7 for bitcoin.
The WEF report warned that Covid threatened to "scale back years of progress on reducing poverty and inequality and to further weaken social cohesion", adding: "Job losses, a widening digital divide, disrupted social interactions, and abrupt shifts in markets could lead to dire consequences and lost opportunities for large parts of the global population."
Many stock indices posted big gains last year despite the collapse in economic activity, with markets kept afloat by vaccine optimism and huge stimulus from governments and central banks. Bubble worries have focused on the US and its tech sector after setting new record highs in recent months.
Several top investors - including Jeremy Grantham at GMO and Mohamed El-Erian at Allianz - have warned that stock markets, especially in America, are entering bubble territory after rapidly bouncing back from the blow dealt by the pandemic.
When a bubble bursts, prices slide and the impact can spill over into the real economy as spending falls and confidence slumps.
The financial crisis was triggered by the collapse of a house price boom, while a recession in the US in the early 2000s was caused by the dot.com bubble popping.
However, other analysts have argued that many valuation measures are less useful in the current environment and point to hopes of a rapid economic recovery.
Mark Haefele at UBS Global Wealth Management said markets "certainly appear frothy in some areas", but argued that equities are not in a bubble.
"Valuations of equity indexes look more reasonable if we consider the backdrop of low interest rates," he said.
