Money management executives and investors are in a quandary. They are in need of returns and require a risk-on stance for their investments, yet they are grappling with fears over high valuations.
Highlighting concerns was the latest "Trends, Risks and Vulnerabilities" report from the European Securities and Markets Authority, in which the Paris-based supervisory body said it sees valuation risk at its highest level due to financial weakness and geopolitical uncertainty. ESMA's report cited high asset price valuations as the "major risk for European financial markets in the second half of 2017," with the main risk drivers identified as uncertainties around geopolitics, the resilience of economic growth and debt sustainability.
A number of money management executives said they agree valuations in global equity and credit markets are high. However, while some have moved to take profits from what they see as expensive valuations and are cautiously risk-on, they generally agree markets are not yet in bubble territory. Some are even anticipating further upside moves in European equities in particular.
And they are in agreement over the need to remain risk-on in order to satisfy investors' thirst for returns.
"Yes, (managers) are worried that we are in or near a bubble, and there is some source of risk that, while currently unknown, will rear its ugly head," said Melissa Brown, New York-based director of applied research at Axioma Inc. "I don't know any managers who are not concerned."
But "to some extent they can't make big moves to reduce their risk because they can't afford to miss out. There is an old saying that the worst thing a manager can do is to miss out on the upside," Ms. Brown said.
That fear is not confined to money managers. In a blog post Sept. 13, George Bonne, New York-based executive director in the equity factor research team at MSCI Inc., wrote that tail risk fears "did not take time off this summer, but have continued to increase." The index provider sees "plenty of reasons for investors to continue buying downside protection" including rising geopolitical tensions.