Global markets have rallied "too much, too soon, too fast" this year but a correction will not happen right away, as a cheap dollar will still encourage investors to seek higher-yielding assets for a few more months, leading economist Nouriel Roubini recently said.
Roubini, one of the few economists who accurately predicted the magnitude of the financial crisis, said the U.S. dollar will eventually recover some of its losses, but only in "six to 12 months from now, not any time soon."
As a result, carry-trade operations — in which investors borrow at low short-term rates, in this case in the U.S. dollar, to buy high-yielding longer securities in other markets — will continue to support prices for a little longer.
"A correction might occur, but the risk of a correction is more in the medium term than in the short term," Roubini said in an event organized by the Council of the Americas.
The economist repeated his view that the U.S. economic recovery will be anemic, subpar and U-shaped, which should translate into worse-than-expected corporate earnings and macroeconomic indicators, eventually forcing asset prices down.
Such a correction will be delayed, however, by a prolonged period of low interest rates and fiscal stimulus.
"I see this kind of tension due to the fact that I think that the real economy will surprise on the downside, especially when the stimulus fizzles out, but on the other side you have these effects of policies, especially monetary and liquidity, that keep asset prices levitating," he said.
Loose monetary policies around the world will result in continuous dollar inflows into developing economies, which are expected to grow faster than developed countries for several years, Roubini said.
The challenge for emerging market countries such as Brazil, Roubini added, will be to implement effective policies to curb excessive capital inflows that have led to "overvalued" currencies.
"The solution is probably along the lines of capital controls," he said, noting that the measures adopted by the Brazilian government so far were not "tight enough" to curb short-term dollar inflows.
Roubini added he remains positive about the Brazilian economy, although there is a too much much "froth and euphoria" in Brazilian domestic markets.
© 2017 Thomson/Reuters. All rights reserved.