The great unwind: real assets acclimatise to new liquidity environment

Central banks worldwide have started the great liquidity unwind – from ultra-accommodative monetary policy to higher-for-longer interest rates in most major markets. This environment is mediated by global regions and poses divergent re-pricing risk for real assets.

Over the past 15 years, vast central bank monetary stimulus became the norm to support economies through successive exogenous shocks – from the global financial crisis, to the euro crisis, Covid-19 and, most recently, Russia’s invasion of Ukraine. The blistering growth of central banks’ balance sheet growth is difficult to reconcile with how normalised it became to investors.

In the US, the Federal Reserve’s balance sheet ballooned 10-fold in 14 years – from $880 billion in January 2008, before peaking at a whisker under $9 trillion in April 2022. Over the same period, the Bank of England’s balance sheet expanded 12.8-fold from £77.7 billion at the end of 2007 to almost £1 trillion today, while the European Central Bank’s (ECB) balance sheet grew almost six-fold from €1.51 trillion at the end of 2007 to €8.76 trillion at September 2022. In Japan, the Bank of Japan’s balance sheet grew by more than six-fold in 14.5 years from 111 to 701 trillion yen by the end of August 2022.

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