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Perceptions of bond overvaluation decrease quarter-on-quarter
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Investors favour risk-off approach
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Potential for value in emerging market equities, should equity markets recover following poor performance in December
CFA UK today released the results of its latest quarterly Valuations Index, measuring investors’ perceptions of the value of equities, bonds and gold in Q4 2018.
The index reveals a positive shift in investors’ outlook on both government and corporate bonds, which have consistently been perceived as overvalued by the majority of investors in recent quarters.
The proportion of investors who believe government bonds are overvalued has dropped since Q3 2018, from 67% to 61%. Likewise, the severity of overvaluation identified by respondents has also calmed. Among those identifying overvaluation, only 16% noted that government bonds were “very overvalued” in Q4 2018, compared to 24% in the previous quarter.
While corporate bonds are still considered worse value than government bonds, perceptions of their overvaluation have also declined. Whereas a total of 76% saw corporate bonds as overvalued in Q3 2018, 69% now believe this to be the case.
These results – collated in December based on asset values in late November – indicate a risk-off mentality among investors in the face of continued market uncertainty.
Respondents’ views on developed market equities, which have been edging towards increasing overvaluation in the long term, improved slightly quarter-on-quarter. Sixty-five percent of respondents noted that this asset class was overvalued in Q3 2018 but this proportion has now declined to 61%.
Nevertheless, the risk-off trend continued, with December proving to be a very poor month for global market equities.
The survey results indicate that, should equity markets recover, we might see opportunities for improvement in emerging market equities’ valuations. Similar to the last quarter, more than half (52%) of the survey respondents believe emerging market equities are either “very undervalued” or “somewhat undervalued”, with an additional 22% seeing fair value in the asset class. This follows their recent under-performance. In spite of that underperformance, there was also a six percent increase in the proportion of respondents seeing emerging market equities as “somewhat overvalued” over the same period.
Gold meanwhile remains a popular choice as investors continue to look to safe haven assets. Eighty-six percent of investors polled said they perceive gold as either fairly valued or undervalued, the highest proportion since the Valuations Index was launched in Q1 2012.
Says Will Goodhart, chief executive of CFA UK: “We have been experiencing rising market volatility in the last two quarters and, given this, it is understandable that we are seeing trends towards bearishness and de-risking among investors at the moment. Our members’ perceptions of bonds have improved and there have only been minor changes in investor sentiment towards equities and gold.
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About the Valuations Index
The Q4 2018 Valuations Index survey closed on 2 January 2019. Investors polled were asked to give their perceptions based on the following values: developed market equities (represented by MSCI Developed Market Index), $ 2034.89 at close 30 November 2018; emerging market equities (represented by MSCI Emerging Markets Index), $ 998.05 at close 30 November 2018; government bonds (represented by J.P. Morgan Global Government Bond Index), yield 1.75% at close 30 November 2018; corporate bonds (represented by S&P International Corporate Bond Index), yield 2.2% at close 30 November 2018; and gold (represented by the London spot fix), $ 1221.68 at close 30 November 2018. The survey was open to all CFA UK members and there was a total of 191 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.