By Steve Goldstein
Asset valuations “appear elevated” relative to historic norms, the Bank of England said Friday in its financial policy committee report.
“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 central bank said.
It didn’t identify which markets it believed were expensive. As of the end of September, 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., according to Citi. Globally, developed markets are trading at 18.3 times next year’s earnings, according to Citi.
The Bank of England said asset valuations could correct sharply if market participants re-evlauate the prospect for growth, inflation of interest rates. The Bank of England added that risks in leveraged loan markets are continuing to build globally.
The central bank also commented on cryptoasset markets, saying they’ve increasingly integrated into the financial system, though the direct risks are currently limited. In debt markets, the Bank of England said corporate debt-to-GDP ratios have increased by about 10 percentage points since the end of 2019, and Evergrande Group /zigman2/quotes/208605330/delayed HK:3333 +8.55% could pose risks to the wider property sector in China. 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, the Bank of England said.
The FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +0.05% edged up 0.1% ahead of the eagerly awaited U.S. jobs report. British Airways owner International Airlines Group /zigman2/quotes/208070069/delayed UK:IAG +0.09% and engine maker Rolls-Royce /zigman2/quotes/203646520/delayed UK:RR -2.89% topped the FTSE 100 leaderboard.
WAG Payment Solutions, better known as Eurowag, slumped to 133 pence after pricing its initial public offering at 150 pence, or a £1 billion valuation.