Investor perception of global bonds as overvalued remains at record level, whilst developed market equities rises to new high

Saturday 31 December 2016

  • Perceptions of developed market equities as overvalued rises to record high for third consecutive quarter

  • Views around government and corporate bonds being overvalued have risen steadily for the last four years and remain at record levels

The perception of developed market equities as overpriced continues to reach 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 71% in Q4. Whereas 27% considered developed market equities to be undervalued at the start of 2016, only 10% now hold that view. Emerging market equities have also seen an uptick in the number of respondents who consider the asset class to be overvalued. This opinion has steadily increased over the course of the year from 19% to 25%, though the consensus remains that the asset class is undervalued, with 43% holding this view.

The perception that global bonds are currently overvalued shows no signs of abating, with this view having remained at its highest recorded level through the second half of 2016. 78% of respondents now view both government and corporate bonds as overvalued, whilst just 6% view each asset class as undervalued.

Respondents’ perceptions of Gold were split. Roughly a third of those polled consider the asset class to be overvalued, another third consider the safe-haven asset class to be fairly valued, and a further third consider it to be undervalued.

Says Will Goodhart, chief executive of CFA UK: “2016 has been a year of significant political shocks, but markets have weathered these well with continuing accommodative support from central banks through most of the year. Our survey respondents now believe developed market equities to be at their most overvalued level in four years, suggesting that they worry that some of the risks that the markets have shrugged off to date may come home to roost. Rising bond yields appear to have removed one of the few remaining reasons to regard equities as undervalued. The Fed's December rate hike and the announcement of more to come in 2017 should mean that bond valuations back down. 2017 is looking like a year where investors should tread carefully.”

Note: The research is not intended to provide a bellwether for the investment climate, or indeed to dispute the notion that markets reflect fair value over the long-term. Over the long run, markets are efficient and investors broadly rational. However, at any single point in time, markets can temporarily depart from fundamental value - our research indicates which asset classes our members think may no longer offer significant value, based on current prices, and others where there might be more value for new investments.

 

*CFA UK Valuations Index

The CFA Society of the UK surveyed its membership between 28 November and 7 December 2016, and received 225 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:

  1. 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%).
  2. 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%).
  3. 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%).
  4. 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%).
  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%.