Global Economy Faces Threat From Overgrown Markets, Sharma Says

(Bloomberg) -- The prolonged bull markets in stocks and bonds have become the biggest threat to global economy.

That’s the analysis of Morgan Stanley’s Ruchir Sharma, who said in an interview on Bloomberg TV that the next economic crisis will be led by a financial market meltdown rather than any economic turmoil. 

“The single biggest risk to the global economy now is that the tail wags the dog,” Sharma said in an interview Tuesday. “The size of the financial economy -- stocks and bonds globally -- is more than three times the underlying economy. It’s quite possible that something happens there, which has a knock-on effect to the economy, rather than the other way around.”

Considering declining global yields have underpinned the explosion in financial assets, rising interest rates could be the catalyst to set off markets, Sharma said. The second threat he noted is a slowdown in global growth that catches market participants by surprise.

“We’ve seen global growth oscillate in a range, and right now we’re at the high end of that range,” the bank’s head of emerging markets said. “Possibly the downward surprises on economic growth could come through in the next six months.”