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Investors see much greater value in emerging market equities than in previous quarter
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Perceptions of bond overvaluation remain high but investors’ outlook has improved quarter-on-quarter
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Government bonds fare better than corporate bonds, with perceptions of their overvaluation dropping almost 10%
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Over three quarters of investment professionals polled continue to believe that Brexit has deteriorated the City of London’s competitiveness
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Gold seen as trading at approximately fair value by almost half of respondents
CFA UK today released the results of its latest Valuations Index, measuring investors’ perceptions of the value of equities, bonds and gold in Q3 2018.
The index reveals significant changes from the previous quarter in investors’ perceptions of developed and emerging market equities. Investors polled are seeing much greater value in emerging market equities than they did in Q2 2018, with over half (53%) now deeming them either ‘very’ or ‘somewhat’ undervalued. This represents an 11% quarter-on-quarter increase and follows a sell-off period of the asset class.
The gap between perceptions of emerging market and developed market equities has also widened since Q2 2018. Sixty-five percent of respondents believe developed market equities remain overvalued, according to the latest survey, whilst only 10% see them as undervalued (the remainder think they are fairly valued).
Perceptions of bond overvaluation have decreased overall, but substantially more value is now seen in government bonds than corporate bonds. Seventy-six percent of respondents now see corporate bonds as overvalued, a decrease of three percent from the previous quarter. Meanwhile, the proportion of respondents who see government bonds as overvalued has dropped from 76% to just over two thirds (67%) over the same period. The changes are to be expected given that credit spreads tightened during the same time and the blended yield of the J.P. Morgan Global Government Bond Index has increased from 1.66% to 1.75%. This also follows rate increases in both the Federal funds rate and the Bank of England bank rate.
Says Will Goodhart, chief executive of CFA UK:
“There are no wildcard results here. The perceptions of respondents correlate directly to shifts in the values and yields of these asset classes. Perhaps most surprising, however, is the extent to which emerging market equities are seen as undervalued. This is likely due to the large currency sell-offs in South America, Turkey and South Africa. Since this survey, we have also seen the Brazil elections impacting emerging markets. Not all has been positive for emerging market equities recently, though; we’ve seen raising rates, a strong dollar and US trade tensions – all of which do not bode well for them – and we may see investors’ perceptions shift to a more neutral position in the coming months. Our respondents continue to see these as uncertain times.”
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Notes to editors:
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About the Valuations Index
The Q3 2018 Valuations Index survey closed on 5 October 2018. Investors polled were asked to give their perceptions based on the following values: developed market equities (represented by MSCI Developed Market Index), $ 2195.68 at close 20 September 2018; emerging market equities (represented by MSCI Emerging Markets Index), $ 1036.93 at close 20 September 2018; government bonds (represented by J.P. Morgan Global Government Bond Index), yield 1.75% at close 21 September 2018; corporate bonds (represented by S&P International Corporate Bond Index), yield 1.96% at close 21 September 2018; and gold (represented by the London spot fix), $ 1197.80 at close 21 September 2018. The survey was open to all CFA UK members and there was a total of 245 respondents.
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.
About CFA UK
Part of the worldwide network of member societies of CFA Institute, CFA UK represents the interests of 11,600 investment professionals in the UK.