Investor perception of global bonds and equities as overvalued hits highest level

Monday 10 October 2016

  • Perceptions of developed market equities as overvalued at the highest levels recorded since the CFA UK’s Valuations Index began in 2012
  • Two thirds of respondents view developed market equities as overvalued
  • Eight in 10 respondents consider government and corporate bonds to be overvalued, prompting concerns over a growing bond bubble

The perception of developed market equities as overpriced has reached new highs, with the proportion of respondents to the CFA UK’s Valuations Index viewing them as overvalued climbing from 40% at the beginning of 2016 to 67% in Q3. Whereas 27% considered developed market equities to be undervalued at the outset of 2016, only 10% now hold that view.

The perception of global bonds as overvalued has also risen markedly. 82% of those polled now consider government bonds to be overpriced, a 7% rise from Q2 and a 15% rise since the beginning of the year. The same is true of corporate bonds, which are now considered by respondents to be at their most overvalued in three years, with 78% believing that the asset class is overvalued, marking a 9% increase since Q2 and a 20% increase since the beginning of the year. Only 5% of the investors polled view both corporate and government bonds as undervalued.

Although emerging market equities saw a slight uptick in the number of respondents who consider the asset class to be overvalued, the consensus is that the asset class is undervalued, with 42% holding this view versus 24% who believe they are overpriced. Similarly, though there was a 9% fall in the number of respondents that view Gold as overvalued, perceptions of the safe haven asset have remained broadly level over the past 12 months.

Says Will Goodhart, chief executive of CFA UK: “The impact of Brexit and concerns around the US election result may be weighing on the minds of investors as the proportion of our respondents viewing developed markets equities as overvalued hit record highs. Similarly, fears of a bond bubble appear to be growing. The broad perception that valuations are now at extreme levels indicates that market values are more than usually vulnerable to rapid and significant change.”

*CFA UK Valuations Index

The CFA Society of the UK surveyed its membership between 15 and 30 September 2016, and received 354 responses from analysts and investors. The respondents were asked how they would rate the following markets in terms of representing fair value on a one-year time horizon:

  • Developed Market Equities (as represented by the MSCI Developed Market Index - $1643.93 at close 8 July 2016): Very undervalued (>15%); Somewhat undervalued (<15%)>; Fair value; Somewhat overvalued (<15%)>; Very overvalued (>15%).
  • Emerging Market Equities (as represented by the MSCI Emerging Market Index - $826.99 at close 8 July 2016): Very undervalued (>15%); Somewhat undervalued (<15%)>; Fair value; Somewhat overvalued (<15%)>; Very overvalued (>15%).
  • Government Bonds** (represented by J.P. Morgan Global Government Bond Index – yield 0.75% at close 8 July 2016): Very undervalued (>5%); Somewhat undervalued (<5%)>; Fair value; Somewhat overvalued (<5%)>; Very overvalued (>5%).
  • Corporate Bonds** (represented by the S&P International Corporate Bond Index – yield of 1.55% at close 8 July 2016): Very undervalued (>5%); Somewhat undervalued (<5%)>; Fair value; Somewhat overvalued (<5%)>; Very overvalued (>5%).
  • Gold (represented by the London spot fix - $1361.06 at close 8 July 2016): Very undervalued (>15%); Somewhat undervalued (<15%)>; Fair value; Somewhat overvalued (<15%)>; Very overvalued (>15%).

**5% undervaluation/overvaluation is a percentage of the yield, as opposed to yield +/- 5% e.g. the opinion that a yield of 2.08% is 5% undervalued implies the respondent believes it should be at c. 2.18%, rather than 7.08%.