Three scenarios leading to a downward correction in asset prices – Natixis

In the recent period, there has been a strong upward trend in asset prices: equities , real estate and corporate valuation. Analysts at Natixis look at three possible mechanisms that would lead to a downward correction in asset prices.

There is no such thing as a perpetual upward trend

“Current inflation can still be considered transitory. For inflation to become permanent, current inflation would have to lead to greater wage increases, which is not yet the case today. If inflation were to become permanent, long-term interest rates would rise, leading to a correction in asset prices. This change, if it happens, would be rapid (2022-2023?), but as the functioning of labour markets has not changed, it is not clear that it will happen.”  

“A fall in savings leads to a rise in equilibrium real interest rates. Population ageing is normally expected to lead to a decline in savings, but this is a long-term trend (2025-2030?).”

“An ‘endogenous’ correction in asset prices is also possible. Rising asset prices eventually cause demand for assets to fall: savers are frightened by the level of equity valuation, households can no longer buy housing, which has become too expensive, companies refuse to make acquisitions at excessively high multiples, etc. The fall in demand then causes asset prices to fall.”