BOE Says Asset Valuations “Appear Elevated” Due To “Search For Yield” And “Higher Risk Taking”

The Bank of England was out with a warning on Friday that asset valuations “appear elevated” and that investors may simply be on a “search for yield” thanks to distortions caused in markets from 18 months of Covid stimulus efforts.

We’re not sure this even means anything any more, to be honest. The likes of former Fed Chair Janet Yellen and well known investors like Carl Icahn have been questioning asset valuations in the U.S. for the better part of the last decade, though the markets barely seemed to notice on their way to nearly doubling since the cautionary statements. 

But nonetheless, the Bank of England questioned the effects of recent stimulus on Friday, stating: “Following the Covid shock, central banks cut interest rates and undertook asset purchases to support economic activity and prevent an unwarranted tightening of financial conditions for corporates and households. Since then, risky asset prices have increased and, in a number of markets, asset valuations appear elevated relative to historical norms. This partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ and higher risk‐taking in a low interest rate environment.”

The BOE didn’t come out and say exactly which parts of the market were expensive, but at this point, blindfolded readers can throw a dart at any asset class and likely arrive at an accurate answer. 

And the BOE’s statements come despite a major disconnect between U.S. and U.K. valuations. MarketWatch commented on Friday: “U.S. companies are trading on a price-to-earnings ratio for next year of 20.6, compared to just 11.8 for the U.K.”

Asset valuations could “correct sharply” in the event that “market participants re-evaluate the prospect for growth, inflation of interest rates”, the report said.

“There are signs of continued loosening in underwriting standards and increased risk-taking in some investment banking businesses,” the BOE also said, according to Reuters. 

The Central Bank also commented on potential coming shocks from Evergrande’s blowup: “A disorderly failure could pose risks to the wider property sector in China with potential spillovers internationally.”

Finally, the BOE commented on crypto markets, noting that they have become increasingly integrated into the financial system though starting that “direct risks” are limited. 

“The U.K. banking system is resilient to the direct effects of a severe downturn in China and Hong Kong, and sharp adjustments in global asset prices,” MarketWatch concluded. 

Sure they are. Brrr…