Many analysts and investors claim that the financial markets of OECD countries are overvalued, given the OECD’s structural and cyclical situation, and that there will be a major downward correction in financial asset prices, another market crash. The overvaluation is attributed to a liquidity glut and the overestimation of growth prospects. We examine this hypothesis in the case of equities, government bonds and corporate bonds, starting from a measurement of the potential growth of OECD countries and their position in the cycle. We analyse:
– The links between growth and interest rates; – The links between the differential between interest rates and growth and the prices of long-term assets (equities); – The links between trends in income distribution, the cyclical situation and credit spreads.
We conclude that probably, for the OECD as a whole: – Long-term interest rates are too low relative to nominal potential growth; – Equities are only very slightly overvalued; – Credit spreads have been too wide since the second quarter of 2015.