The Bank of England expects global stock markets to fall because current share prices do not reflect the scale of risks facing the world economy, its deputy governor for financial stability has said, as reported by BBC.
Sarah Breeden told the BBC that investors appear overly complacent despite a growing list of vulnerabilities. "There's a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point," she said.
Breeden declined to predict when a correction might occur or how severe it could be, but said the possibility of several shocks hitting simultaneously was a key concern. "The thing that really keeps me awake at night is the likelihood of a number of risks crystallising at the same time – a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust - what happens in that environment and are we prepared for it?" she said as reported by BBC.
Global equities, led by the United States, have recently reached record highs. This has happened despite warnings from the International Energy Agency that the global economy is facing the biggest energy shock in its history. Heavy investment in artificial intelligence has been a major driver of US markets, with technology firms spending hundreds of billions of dollars on AI infrastructure.
Microsoft founder Bill Gates has equated the rush into AI to the late-1990s dotcom bubble, when inflated valuations collapsed. Others, including Nvidia chief executive Jensen Huang, have dismissed fears of a bubble.
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Shadow Banking — What Are The Risks?
Breeden also highlighted risks in the rapidly expanding “shadow banking” sector, particularly private credit funds that lend to companies outside the traditional banking system. Several such funds have suffered losses and restricted investor withdrawals. "Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. It hasn't been tested at this scale with the degree of complexity and interconnections it has with the rest of the financial system so far," she said, as reported by BBC.
While the UK stock market lacks the large AI firms driving US gains, the FTSE 100 is also trading within 5% of its all-time high. Breeden said the Bank's priority was not forecasting market falls, but ensuring the financial system can withstand them if they happen.
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