18 September 2017
Long-Term Asset Return Study. The Next Financial Crisis
Stretched Asset Prices succumbing to Gravity
In the last couple of annual long-term studies we have highlighted that we're
in a period of very elevated global asset prices - possibly the most elevated in
aggregate through history. Figure 57 updates our analysis looking at an equal
weighted index of 15 DM government bond and 15 DM equity markets back to
1800. For bonds we simply look at where nominal yields are relative to history
and arrange the data in percentiles. So a 100% reading would mean a bond
market was at its lowest yield ever and 0% the highest it had ever been. For
equities valuations are more challenging to calculate, especially back as far as
we want to go. In the 2015 study (Scaling the Peaks') we set out our current
methodology but in short we create a long-term proxy for P/E ratios by looking
at P/Nominal GDP and then look at the results relative to the long-term trend
and again order in percentiles. Nominal GDP data extends back much further
through history than earnings data. When we have tracked the two series
where the data overlaps we have found it to be an excellent proxy. Not all the
data in Figure 57 starts at 1800 but we have substantial history for most of the
countries (especially for bonds).
Figure 57: Aggregated 15 DM country average bond (nominal yields) and
equity percentile valuations (100% = most expensive; 0% = cheapest)
100% —Average (Bonds and Equity)
90% •
80% •
70% •
60% •
50% •
40% •
30% -
20%
10%
0%
1800 1825 1850 1875 1900 1925 1950 1975 2000
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As can be seen, at an aggregate level, an equally weighted bond/equity
portfolio has never been more expensive. Figure 58 shows that bonds are
much closer to 100% than equities though and Figure 59 then looks at the raw
data for bonds showing average G7 yields back to 1800.
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