That asset prices the world over are high is without question. That bond yields are confusing at least and terrifying at worst is also increasingly undisputed, which leaves us with equities. Here too valuations are lofty. Indeed, equities have been in a technical bull market for more than six years. But (and in recent years there has frequently been a but) the euphoria that often accompanies such mature bull markets, is distinctly lacking.
Which begs the question: Is this cycle then particularly elongated because of the exceptionally low level from which it was recovering as a result of the crash, or are we actually in the midst of the euphoria stage already and we haven’t realised because we are just too involved to actually see what is going on?
Far from a bubble?
Kevin Gardiner, investment strategist at Rothschild is of the view that we are far from bubble territory at present, across both bond and stock markets. However, while he does not believe that markets are fundamentally overvalued, that does not mean that a material setback could be on the cards.
But, he says in the firm’s May Market Perspective: “As we look at things, the ascent in stocks since early 2009 has not been a huge surprise, and has been based largely on a predictable – and clean – rebound in corporate profits in the US. We look at as many valuation indicators as we can, and they tend to suggest that valuations now are full but not excessive.
According to Gardiner, a cyclically-adjusted approach applied to internationally-comparable earnings data suggests that the US stock market has been a little expensive of late, but Europe and the wider developed world has not been. Most emerging markets similarly seem inexpensive – the most obvious exception as noted above being perhaps the onshore, A-share markets in China, which are luckily still not widely-enough owned to be capable of doing much direct damage to the international markets.”
Looking at the same metric, Kevin Murphy, co-manager of the Schroder Recovery Fund, however, came to very different conclusions recently, saying last month that the markets current CAPE ratio of 27.8x puts it in the 96th percentile of valuation – “in other words, very expensive indeed.”
He went on to add: “On a more traditional PE ratio level, the market is as expensive as it has ever been since 1950, which is the earliest point for which this data is available. Put simply, on this measure, the average stock in the US market is even more expensive than it was in … 1999.”
John Bilton, global head of multi-asset strategy, J.P. Morgan Asset Management has a view somewhere in the middle and has another reason for the seemingly grudging investment into equities that continues to push up valuations.
He believes there are three factors that are accounting for the recent market skittishness: extrapolation of the soft patch in the U.S., fear over the impact of higher U.S. rates and lingering skepticism over the global recovery.
“Notwithstanding soft first-quarter U.S. data, most macro data points show the U.S. economy in mid-cycle,” he said.
But, he added: “It would be extraordinary for the U.S. to move from a prolonged early-cycle phase directly to late-cycle before the Federal Reserve raises rates, but this fear of “policy error” haunts investors.”
For Bilton, while both policy and growth divergence is likely to remain in 2015, he is of the view that the global economy is improving.
“We expect both data and policy to reinforce the notion that the U.S. economy is in mid-cycle. Paradoxically, the very fear that the economy will lurch to late-cycle or slide into recession will probably restrain the exuberance that is common at the peak of a cycle,” he explains.
It is of course in that fear that much of this turns. Asset prices are indeed high, and while a few unexplored pockets remain, value is hard to find in all parts of the market. But, it is also true that we are currently living through a massive global financial experiment, with no reference point that looks even remotely adequate to begin to explain what may happen. Where the words of central bankers have taken on much more import than fundamentals.
In such environment the only thing that can be said with certainty is that nothing can go up forever. But whether the bubble will be marked with the froth of roiling markets or slowly deflate in a haze of below trend growth is hard to know and there is a fine line between making the right call far too early and being wrong for a very long time.
