Citibank foreign exchange strategist Matt King notes that the 12-month change in the MSCI Global Equity Index has tracked central asset purchases during the past eight years. He projects the likely reduction in asset purchases and calculates that if the relationship holds up, equities will fall by 30%.

MSCI global equity index
Source: Citibank

Of course, that doesn’t mean investors should sell stocks now, Citi says:

“At the end of the day, the positive economic backdrop observable right now is a risk asset positive, in our view. However downside risks are definitely building at a time when valuations are getting more stretched. As we wrote, in our latest Global Asset Allocation, we feel like it’s too early to fully allocate out of risky assets just yet, and stick to our relatively defensive approach to the reflation trade by being slightly overweight stocks with our preferred adjacent overweight in cash. The latter serves as three things: i) a better portfolio hedge in a base case world which sees rising government bond yields ii) an acknowledgment that valuations are rich, and iii) a tool to be tactical even in medium term GAA portfolios, by having powder to jump into opportunities when they arise.”