(Yicai Global) Nov. 30 -- Stocks in the United States do not have the fundamentals for a sustained rise next year, and there is a risk of the asset bubble bursting, according to the managing director and head of research at BOCOM International Holdings.

Since the outbreak of the Covid-19 pandemic, the US stock market has reached new highs, partly thanks to stimulus from unprecedented monetary easing, Hong Hao told Yicai Global. The gains has been almost in line with the expansion of the Federal Reserve’s balance sheet, and the correlation between the two has become more significant since the pandemic, he said.

As the global economy picks up better than expected, monetary policy is facing a return to normal from an ultra-loose position, Hong said in an interview.

The Fed has started tapering its bond purchases as scheduled, and the huge amount of new liquidity that is the main driver of the current bull stock market will gradually fall away, so US equity prices will reflect these changes, according to Hong.

The US asset bubble will further limit the Fed's ability to expand its balance sheet, he noted. The actual earnings yield of US stocks is at a historic low, below the levels in August 1987, March 2000 and August 2008.

In addition, the risk of uncertainty over a resurgence of the epidemic looms large, Hong said. If Covid-19 returns next year, as it repeatedly did this year, that would be the worst-case scenario, he said.

If the pandemic continues to rage and disrupt supply chains, inflation will not temporarily retreat due to base effects, but will remain high, Hong noted. Meanwhile, as economic growth continues to slow, the Fed and other central banks will have to tighten monetary policy beyond expectations in the face of high inflationary pressures.

That would be a classic stagflation scenario, with both stocks and bonds struggling to perform, Hong pointed out.

But US stocks may have relatively high single-digit growth in returns after a technical adjustment next year, he added, and some investors may reduce their positions because of the mismatch between risks and returns.

Editor: Tom Litting