Prior to the Brexit vote, there was a wide range of valuations but few cheap assets globally, as shown in the chart below. With most asset valuations still looking fair to expensive, it’s important to focus on relative valuations.
Modest economic growth, low inflation expectations and easy central bank policies have sent yield lower, intensifying flows into income-oriented assets. This partly explains extreme valuation differences between equities and government bonds. Valuations tell us little about short-term returns but can potentially shed light on medium-term returns. Starting valuations explain roughly 10% of U.S. equity market returns over the following year but 87% of returns over the next 10 years, according to the analysis back to 1988.