Deutsche Bank: Assets Are At ‘Peak Valuation’ According To 200 Years Of Data

By: Rupert Hargreaves

Assets around the world are at peak valuations, according to Deutsche Bank AG, which released its annual Long-Term Asset Return Study a few days ago.

This year's volume of the asset return study is aptly named Scaling The Peaks, as the data presented in the report shows that at least three major asset classes, bonds, stock and real estate are all trading close to peak valuation levels relative to history. To see a well constructed counterargument on using 200 years of data see this piece by Josh Brown of The Reformed Broker.

Assets are at 'peak valuation'

Deutsche Bank examined over 200 years of data to arrive at this conclusion and looking through the data they found that:

"Looking at three of the most important assets (bonds, equities and housing) across 15 DM countries, with data often stretching back two centuries, we are currently close to peak valuation levels relative to history. Indeed when aggregated, current levels are higher on average across the three asset classes than they were back in 2007/08 and certainly higher than in 2000. At the equity market peak back in the summer months of 2015 we were pretty much at the peak."

Assets have reached 'Peak Valuation'

The recent market correction should be viewed in context with these charts. It's clear that global central bank liquidity and asset purchases have pushed asset prices to these levels. The problem is, that as the Federal Reserve gets closer to initiating a tightening cycle the risk of a further correction in global asset prices increases.

Deutsche Bank's data shows that rate hikes generally take time to impact the economy. Real GDP tends to climb for around six months after the rate cycle turns, before drifting lower. Based on data from the twelve US hiking cycles since 1950, it has taken between 11 and 41 months for an economy to fall into recession after the first rate hike. Historic data also shows that equities continue to climb initially but seem to stall 12-24 months after the first hike. Bond yields generally climb during the 12 months following the first rate hike.

Assets have reached 'Peak Valuation'

Peak Valuation - 200 years worth of data

Deutsche Bank's claim that assets are at 'peak valuation' is based on the analysis of 200 years worth of data across 15 of the world's most important developed economies; Australia, Canada, Denmark, Finland, France, Germany, Italy, Japan, Korea, Netherlands, Spain, Sweden, UK and the US.

Assets studied were equities, bonds and house prices. Equity valuations were computed at the index level using P/E ratios and where these weren't available, using Nominal GDP as a deflator of long-term total returns was used. This approach is based on the assumption that long run earnings should broadly be tied to nominal GDP.

As the chart of the top of the article shows, across the three main asset classes, average valuations are close to the highest they’ve ever been relative to their long-term trend. The current reading of just under 80% ( at 100% the asset is at its most expensive ever relative to its trend and 0% is the cheapest) is similar to that seen at the turn of the twentieth century and during the 1940s when financial markets were artificially repressed around war time. Housing data isn't added until 1970.

Bonds are the most overvalued of the trio, Deutsche Bank's average percentile valuation puts them close to 100%. For equities, the current figure is 77% down from 83% earlier in 2015, although both of these two figures are still below the peaks of 90% in May 2007 and 87% at various points in 2000. After peaking at around 75% during 2007, housing has dropped to around 50%.

So, on closer inspection it's only the bond market that's trading at its 'peak valuation'. But when aggregated, all three asset classes are trading at higher valuations now than they were back during 2007.

Deutsche:

"Interestingly housing is back to 50% on this measure having peaked at 75% in 2007. As we’ll see in the separate housing section, this masks a wide range of valuations among the individual countries. Bonds are quite clearly close to 100% on this measure reflecting the fact that yields are still close to multi-century all time lows. For equities the current figure is 77% (down from 83% earlier in 2015), still high relative to history but shy of the last two peaks of 90% in May 2007 and 87% at various points in 2000. Interestingly in the 2000 equity bubble, housing was generally in the low 30% region and bonds the low 40% region. In 2007, both bonds and housing were in the mid 70% area. When aggregated though, current 2015 levels are higher on average across the three asset classes than where they were back in 2007."