High company valuations a ‘worry,’ IMF’s capital markets chief says

High
corporate
valuations
could
pose
a
significant
risk
to
financial
stability
as
market
optimism
becomes
untethered
from
fundamentals,
the
IMF’s
director
of
the
Monetary
and
Capital
Markets
Department
said
Tuesday.

Financial
markets
have
been
on
a
tear
for
much
of
this
year,
buoyed
by
falling
inflation
and
hopes
of
forthcoming
interest
rate
cuts.
But
that “optimism”
has
stretched
company
valuations
to
a
point
where
that
could
become
vulnerable
to
an
economic
shock,
Tobias
Adrian
said.

“We
do
worry
in
some
segments
where
valuations
have
become
quite
stretched,”
Adrian
told
CNBC’s
Karen
Tso
Tuesday.

“It
was
led
by
tech
last
year,
but
at
this
point,
it’s
really
across
the
board
that
we
have
seen
a
run
up
in
valuations.
There’s
always
this
question,
if
a
negative
shock
were
to
hit
to
what
extent
do
we
see
a
readjustment
of
pricing,”
he
said.

Adrian,
who
was
speaking
on
the
side
lines
of
the
IMF’s
Spring
Meeting
in
Washington,
said
that
credit
markets
were
a
particular
area
of
concern.

“I
would
point
to
credit
markets,
where
spreads
are
very
tight
even
though
borrower
fundamentals
are
deteriorating,
at
least
in
some
segments,”
he
said.

“Even
riskier
borrowers
are
able
to
issue
new
debt,
and
that’s
at
very
favourable
prices,”
he
added.

The
IMF’s
financing
concerns
also
extend
to
the
property
market,
and
chiefly
commercial
real
estate,
which
Adrian
said
had
grown “somewhat
worrisome.”

Medium
and
small-sized
lenders
in
particular
could
be
vulnerable
to
commercial
real
estate
shocks
as
the
sector
has
come
under
pressure
from
a
shift
to
remote
work
and
online
shopping,
he
said.

“There’s
really
a
nexus
between
exposure
of
some
banks,
particularly
middle
sized
and
smaller
banks,
to
commercial
real
estate
that
also
tend
to
have
[a]
fragile
funding
base.
Sort
of
the
combination
of
having
a
risk
exposure
to
commercial
real
estate,
and
this
fragile
funding
that
could
in
some
scenarios,
reignite
some
instability,”
Adrian
said.

The
IMF
on
Tuesday
released
its
World
Economic
Outlook,
in
which
it

upgraded
its
global
growth
forecast
slightly,
saying
the
economy
had
proven “surprisingly
resilient.”

It
now
sees
global
growth
at
3.2%
in
2024,
however
it
noted
that
downside
risks
remain,
including
regarding
inflation
and
the
increasingly
uncertain
path
forward
for
interest
rates.

Federal
Reserve
Chair Jerome
Powell said
Tuesday
that
the
U.S.
economy
has
not
seen
inflation
come
back
to
target,

adding
to
the
unlikelihood
that
it
will
cut
rates
in
the
near-term.

“We
do
see
risks
in
terms
of
inflation
persistence.
Some
of
that
has
realized
already,
but
of
course
we
could
see
further
surprises,”
Adrian
said.

“We’ve
[cited]
risks
as
broadly
balanced
around
the
globe.
But
in
some
countries,
there’s
a
little
bit
more
upside
and
others
a
little
bit
more
downside.
So
certainly,
interest
rate
risk
is
a
key
factor
we’re
looking
at,”
he
added.