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Anthony Rowley

Financial markets, stock markets especially, appear able to defy gravity despite the global geopolitical and economic situation. A plethora of institutional and individual explanations have been offered as to why, but most seem to miss the point.
Which is, at least in part, that we have created a kind of monster in the asset management industry, which channels a glut of global savings into a limited number of investment areas and which, by virtue of these captive inflows, is able to maintain asset valuations at record highs.
The value of global assets under management is set to rewrite records, with PricewaterhouseCoopers expecting the figure to rise from nearly US$140 trillion in 2024 to US$200 trillion by 2030. McKinsey, which puts the 2024 figure at US$135 trillion, said this had grown to US$147 trillion in mid-2025.
This represents power indeed to influence share prices. The benchmark S&P 500 index has soared to record highs in recent days as has the tech-heavy Nasdaq index, while Japanese stocks have also soared to new highs with the benchmark Nikkei Stock Average briefly rising above the 60,000 mark for the first time.
All kinds of superficial explanations are on offer as to why stock markets are again displaying what former US Federal Reserve chairman Alan Greenspan called “irrational exuberance”.
Apart from the shaky and apparently indefinite ceasefire announced by the United States in the war it launched, together with Israel, against Iran, stock investor exuberance is being attributed to a belief that markets are “looking through” the war and its consequences to better days beyond. That and tech companies, particularly those involved in artificial intelligence, are still churning out good earnings results for now.


While these factors contribute to market euphoria, the true causes go deeper, to structural issues: principally that too much portfolio investment is chasing too few real-world needs for long-term economic investment.
Over the last two decades, the amount of money flowing into stocks (in a declining number of listed companies in major economies) has grown exponentially, encouraged by governments and financiers in the belief that the market is the best arbiter of savings. Stock valuations have soared accordingly, especially in the fashionable tech and AI sectors.
Confusion seems to reign meanwhile over why stocks keep flying so high. In a note circulated by the Atlantic Council, Katrin Bennhold noted recently: “The S&P 500 hit another record high last week? It’s now higher than before the fighting began on February 28. What’s going on? Do traders really not care about the [Iran] war? Or do they know something we don’t?”
Or, as a New York Times contributor put it on April 18, “the stock market makes no sense right now”. For good measure, the Financial Times headed an April 20 special report on risk management with the question: “What will drag the financial system into a crisis?”
What indeed? I put this question to Jason Wu, assistant director overseeing the global markets analysis division at the International Monetary Fund and a member of the team that prepared the latest IMF global financial stability report, during a video call on April 17.

Financial markets are being widely credited with great resilience in the face of wars, wider political turmoil and a slowing economy. But to what extent, I asked, is this so-called resilience based upon informed judgment, or is it a product of the guaranteed inflows of institutional savings, via pension funds, life assurance companies and the like, into markets?
The resilience, Wu observed, “has a lot to do with circumstantial factors and something to do with structural factors”. His comment echoed the caution that public institutions need to display to avoid upsetting markets. Markets “are rational” and are not simply “looking through” all the bad news, Wu argued. They are reacting to the “ebb and flow” of news about the Middle East war and, meanwhile, “some risk positions have been trimmed”.
“There has not been the type of decisively bad news that wasn’t then corrected the next day and that would lead to a sustained market drawdown,” he said. It is difficult to see, however, just how bad the news has to get before markets stop seeing the world through rose-tinted glasses.
Wu further argued that there are several structural factors that have made markets more resilient. The first is that the core of the financial markets – banks – are much safer and better regulated since the 2008 global financial crisis. The official view – as represented at least by IMF officials – is thus that the heart of the financial sector has become quite resilient to shock.

The view also appears to be that the risk of a crisis in markets has been reduced by the greater risk-sharing among financial institutions as formerly dominant banks have been joined by a host of non-bank financial institutions as lenders and investors. Other institutions – pension funds and insurance companies, as well as various investment funds – are taking a larger share of the financial market risk.
Yet this has, paradoxically, also heightened risk. Wu, for one, concedes that “what we worry about is that flow of water from the river is branched now into more problematic ponds”. The question is “whether there is excessive risk taking in very illiquid assets”. A good question, that, as is also the question of whether the fund management industry has become too big for its own good and that of most of us as savers and investors.


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Banking & finance

The real reason stock markets are still flying high despite grave risks

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Opinion

World Opinion

Asia Opinion

News

Economy, Trade & Business

World

United States & Canada

For all the talk of market resilience, too much portfolio investment is chasing too few real-world investment areas


For all the talk of market resilience, too much portfolio investment is chasing too few real-world investment areas.


Stocks

Investing

International Monetary Fund (IMF)

Global Financial Crisis of 2007-2008

New York Stock Exchange

Standard & Poor's (S&P)

Artificial intelligence (AI)

AI: Companies

Macroscope

Japan

United States

McKinsey & Company

Atlantic Council

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

The real reason stock markets are still flying high despite grave risks

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}For all the talk of market resilience, too much portfolio investment is chasing too few real-world investment areas

For all the talk of market resilience, too much portfolio investment is chasing too few real-world investment areas