Valuations across most asset classes are at the highest levels they have ever been, according to AQR.
Stocks and bonds, particularly in the US, are in the top 85th percentile of historic levels, said AQR founding principal Cliff Asness at a briefing in London on Thursday. He also warned: “I don’t know of any large liquid asset class that’s not expensive.”
“If banks are unwilling to take on risk now they will be very unwilling in the next big bad event. It will make things function worse, not better.”—Cliff Asness, AQRAntti Ilmanen, principal at the group, added that, as there was not one single asset class or area that was significantly more expensive than others, “these types of value signs are not useful for contrarians”.
“There could be a price that is too high but timing when that happens is very difficult,” he said.
Although AQR admitted concern over valuations, Asness and his colleagues maintained that it did not mean a market crash or financial crisis was imminent.
“It could be the case that the world crashes, but it could be that things stay expensive and generate returns, but less than expected,” Asness said.
Michael Mendelson, principal, said investors had become complacent but “that doesn’t mean a bad event is more likely.”
The S&P 500 hit an all-time high last month, closing at 2,011 on September 18. This marked a 9.7% gain for the year, but the index since fell back to close at 1,946 on Thursday.
US 10-year government bonds have also rallied this year, with yields declining from 3.03% at the start of 2014 to 2.43% on Thursday. A Bloomberg index of global corporate bonds has risen 3.2% in 2014.
On bond market liquidity, Mendelson echoed the views of some fixed income investors that bank withdrawals from the market have hurt liquidity. He said the situation was “on the road to getting worse” and “can make certain types of trades more expensive”, although he played down the impact in the current environment.
Asness added: “If banks are unwilling to take on risk now they will be very unwilling in the next big bad event. It will make things function worse, not better.”
Mendelson emphasised that liquidity and transaction cost issues had not affected AQR as the firm trades primarily in equity and futures, both of which he said were cheaper than ever to trade.
AQR features in the Risk Parity Survey, published in the October edition of Chief Investment Officer. To subscribe to the print or digital editions, click here.
Related Content: Frothy Valuations? Dial Back Risk, Bank Says & AQR’s Asness: How I Learned to Stop Worrying and Love Smart Beta