Business The IMF warns of a "latent risk" in stock...

The IMF warns of a “latent risk” in stock markets

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The correction may result from a deeper and longer recession than current expectations, a second wave of the virus, or a re-enforcement of its containment measures.

The fund said the widening range of social unrest due to growing economic inequality could also hurt investor confidence.

Adrian said: “We fear that the economy will hit scars, meaning that the crisis goes on and deepens more than expected … scars result from high levels of unemployment and bankruptcy. These are difficult to fix.”

He wrote that a sharp correction in asset prices could lead to a massive displacement of capital from investment funds, as happened early in the year, which could spark a frantic sale of assets below their real prices.

The Monetary Fund said that the banks entered the crisis armed with high levels of liquidity and capital reserves, but bankruptcies will test the strength of the sector.

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Stock markets fell sharply earlier this year as sentiment was negatively affected by the virus and related closures, but they have risen broadly since the very low levels they recorded on March 23.

After falling 34 percent in no more than 23 trading sessions, the index “Standard & Poor’s” benefited from the support provided by central banks, and is currently only 10 percent from the highest levels ever.

“A breakup has arisen between financial markets and economic prospects,” said a report prepared by Tobias Adrian, director of the fund’s money and money markets department and Fabio Natalucci, deputy director of the department, adding that “this raises the risk of another correction in high-risk asset prices.” Stock and corporate bond markets are “overrated”.

The warning comes a day after the International Monetary Fund cut back its forecasts for the global economy in 2020.

The correction may result from a deeper and longer recession than current expectations, a second wave of the virus, or a re-enforcement of its containment measures.

The fund said the widening range of social unrest due to growing economic inequality could also hurt investor confidence.

Adrian said: “We fear that the economy will hit scars, meaning that the crisis goes on and deepens more than expected … scars result from high levels of unemployment and bankruptcy. These are difficult to fix.”

He wrote that a sharp correction in asset prices could lead to a massive displacement of capital from investment funds, as happened early in the year, which could spark a frantic sale of assets below their real prices.

The Monetary Fund said that the banks entered the crisis armed with high levels of liquidity and capital reserves, but bankruptcies will test the strength of the sector.

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