Some investors may be under-pricing risk: Trichet
European Central Bank president Jean-Claude Trichet said some investors aren’t taking full account of potential risks as markets surge.
By Agencies |
BASEL: European Central Bank president Jean-Claude Trichet said some investors aren’t taking full account of potential risks as markets surge.
“There are indications which are perhaps suggesting an under-pricing of risk,’’ Trichet said after chairing a meeting of the Group of 10 central bankers in Basel, Switzerland, Monday “It’s clear we are observing a low level of volatility, a low level of risk premia, a low level of spreads. A disorderly correction of this possible under-pricing of risks was something we discussed.”
Global equity markets last week advanced to the highest levels since the start of the decade. Less than three months after concern about a US slowdown roiled financial markets, the US Standard & Poor’s 500 Index topped 1500 for the first time since September 2000, European stocks rallied to a six-year high and Asian stocks climbed to a record.
The world’s major central banks raised borrowing costs last year to contain inflation and stem liquidity growth, marking the first global tightening of monetary policy since 2000.
“We are in an episode of the global economy which is extremely encouraging, but there is no time for complacency,” Trichet said. “We have to continue observing price stability as a necessary pre-condition for sustainable prosperity.”
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Trichet met with G-10 policy makers including Bank of Japan governor Toshihiko Fukui, US Federal Reserve vice-chairman Donald Kohn and Zhou Xiaochuan, governor of the People’s Bank of China. The G-10 meeting is held every two months under the auspices of the Bank for International Settlements. Zhou said in an interview on his flight to Europe from Beijing that there’s room to raise commercial banks’ reserve requirements further after seven increases in 11 months failed to slow lending and inflation. Asked if he’s concerned a bubble is developing in China’s stock market, Zhou replied: “yes.”
The nation’s benchmark Shanghai and Shenzhen 300 Index more than doubled last year. Trichet said there are some “rational elements” behind the surge in equity markets. “There is certainly the element that the real economy is going quite well and expected earnings are quite robust, so there are quite rational elements behind what we are observing,” he said. Still, “we consider all partners have to be alert.”
The G-10 comprises the US, Japan, Germany, the UK, France, Italy, Canada, Sweden, the Netherlands, Belgium and Switzerland. The members account for 85 per cent of the global economy. China attends in its capacity as a BIS board member while smaller nations are invited to a meeting of world central bankers held the same day.
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