Rising inflation expectations boosted equity and real estate prices in the first quarter, but weighed on government bond prices, according to new research.
In its recent assessment of asset prices for the first quarter of 2017, ratings agency Moody's noted that despite signs of deleveraging, equity and property markets in advanced economies "appear increasingly elevated".
Equity prices in the US and Sweden advanced further over the quarter, and levels remain high in relation to economic growth. "Both markets also exhibit high market cap-to-GDP metrics, rich price-to-earnings ratios and low volatility," the agency said.
Moody's also opined that house prices are showing signs of overheating in a number of advanced economies, and that prices in Australia, Norway and Sweden are considerably above 10-year averages relative to GDP, with other indicators signalling rising vulnerability.
Private credit-to-GDP levels in most advanced economies are showing signs of deleveraging, the agency added.
However, in some countries increasing credit levels are being accompanied by rising house prices. "While rising private credit levels in emerging markets partly reflect a trend of financial deepening, elevated credit metrics that are combined with high asset prices, in countries such as China, Turkey and Thailand, signal a potential vulnerability."
In the currency markets, emerging market currencies outperformed advanced economy currencies as the US dollar weakened and market sentiment toward these economies improved. "The South African rand, Brazilian real and Mexican peso saw the largest gains over the quarter, alongside a significant decline in government bond yields."
Nonetheless, Moody's found that bond prices for advanced economy sovereign debt remain elevated across the board, even after rising inflation expectations weighed on the market in the first quarter.