Central banks may force investors to hold expensive equities for years to come by leaving interest rates lower than inflation, according to Fleming Family & Partners Ltd.

U.S. stocks are trading at 23.8 times their 10-year average earnings, compared with their average valuation of 16.5 since 1881, according to Yale University Professor Robert Shiller. U.S. government bonds have dropped 3.8 percent this year, according to Bloomberg indexes, and may fall further as the majority of economists expect the Federal Reserve to start reducing its monthly asset purchases next week.

“History tells you that you have to de-risk, but what if you have to de-risk into bad assets?” said Arthur Grigoryants, who helps oversee $6 billion, in an interview in London on Sept. 12. “Your option is to keep holding risk while the music keeps playing, or you move into assets that may cap your returns.”

The Standard & Poor’s 500 Index last month climbed to a record high amid signs of a global economic recovery. Fed Chairman Ben S. Bernanke and European Central Bank President Mario Draghi have both pledged to leave interest rates at record lows for a prolonged period. Company earnings in the equities benchmark represent 6.20 percent of share prices, 3.28 percentage points more than yields on 10-year Treasurys. The premium offered by equities has come down from as much as 6.70 percent in 2011.

“While the Fed was behind us, everyone was happy to hold those assets,” said Grigoryants, an investment manager at the family office. “But now that the thing has been pushed so far, staying in the game has become dangerous.”

Bond Tapering

The Fed began buying $40 billion of mortgage-backed securities per month in September last year and then $45 billion of Treasurys in December. The central bank had already lowered its benchmark rate to almost zero. The Fed will decide to reduce its monthly bond purchases to $75 billion when it meets next week, according to the median estimate of 34 economists surveyed by Bloomberg News on Sept. 6.

The central bank will continue to buy mortgage-backed securities at its current pace, while reducing its Treasury purchases to $35 billion per month, the economists predicted.

FF&P said the Fed held interest rates at 3 percent for almost two decades in the aftermath of the Great Depression in 1929, meaning bondholders’ returns were less than inflation.

London-based FF&P, which traces its origins to the 19th-century Scottish financier Robert Fleming, said in a note to investors obtained by Bloomberg News that the best returns may come from investments such as non-directional hedge-fund strategies, catastrophe-insurance bonds and developing-nation local currency debt.

Emerging Markets

“Emerging-market equities are the only reasonably priced asset class,” the firm wrote. “We maintain, somewhat reluctantly, a relatively full exposure to the least overvalued assets, such as global equities.”

The S&P 500 has risen 149 percent from its 12 1/2-year low in March 2009. The equity benchmark traded at 15.5 times its constituents’ forecast earnings on Aug. 2, the highest multiple since April 2010.

Investors could lose money by staying out of the market as inflation would erode the value of their assets, Fleming Family & Partners said in the newsletter.

“We could continue playing the game and remain fully invested, trying to chase the last few points of available return,” the family office said in the letter. “But, even if one is able to identify the critical policy change, there is a high risk of being trampled by the crowd as all investors run for the fire exit.”