BIS Quarterly Review, June 2003

Buoyant markets in weak economies

April and May 2003 saw an unusual divergence in market views about global growth prospects. Equity and credit markets rallied during this period even as yield curves flattened. A series of disappointing macroeconomic announcements led investors in swap and government bond markets to revise their expectations of economic growth downwards. By contrast, investors in equity and credit markets discounted the weak macroeconomic data and instead focused on better than expected corporate earnings reports. Spreads on higher-yielding debt, both corporate and sovereign, fell to levels last seen in the late 1990s, when global growth was significantly stronger than today. Faced with exceptionally low nominal yields, investors appeared willing to take on more credit risk in their search for higher returns. Despite a surge in bond issuance in the first quarter and very weak equity issuance, investors’ expectations of a further strengthening of corporate balance sheets seemed to remain intact. Heavily indebted emerging markets such as Brazil and Turkey, which had found themselves shut out of international capital markets as recently as July last year, regained access on relatively favourable terms.