Are markets expensive?

HOW worried should you be about current financial market valuations? Global equities have provided investors returns of almost 21 per cent in US dollar terms since the start of this year alone, making them more expensive relative to earnings since the start of the year. The story is a similar one for global corporate bonds, with year-to-date returns of just over 7.5 per cent, reducing yield premiums over benchmark US government bonds to their lowest since the 2007-08 crisis.

Unsurprisingly, this performance often leads to a common concern: have equity and corporate bond market valuations become too expensive for investors to add further exposure at current levels? We believe the answer is no - we see continued opportunities in both equities and corporate bonds.

It may be helpful to set some context. Valuation metrics should not be used as indicators of expected returns in isolation. They can be helpful as indicators of future returns over long periods of time (usually five to seven years for equities, for example). However, valuations on their own tend to be much less useful over shorter periods of time, especially if one's time horizon is less than a year, when other factors (such as liquidity) can dominate.