Why Equity Markets Should Welcome - Not Fear - Liquidity Withdrawal

After the prolonged economic expansion that central banks have supported by injecting vast quantities of liquidity, equity market normalization has begun. This has led to a sharp fall in correlation among and within sectors in both developed and emerging markets, as investors have become more active and selective.

Far from normal, in our view, is the liquidity still sloshing about in global capital markets. For example, liquidity in the US banking system is currently running high with a loan/deposit ratio of just 73%, meaning 27% of deposits are invested in mainly fixed income capital market assets, despite low expected returns.

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