Developed market equities views as overvalued

Monday 28 December 2015

  • Perception of bonds being over valued rises strongly after dip in Q3
  • Developed market equities seen to be increasingly overvalued
  • Perception of Emerging Market Equities being undervalued rises to Q2 2014 levels

The latest Valuations Index from the CFA Society of the UK (CFA UK) shows a sharp rise in the proportion of respondents who view bonds as overvalued following a marked decline in Q3 2015. The findings show that the proportion of investors polled who consider Government Bonds as being overvalued has risen 9% to 79% while the number who consider Corporate Bonds to be overvalued has risen 7% to 73% suggesting that the feeling in Q3 2015 that the ‘bond bubble’ may be easing was only temporary.

In the same vein, over half of respondents (52%) meanwhile, now regard developed market equities as being overvalued while only 13% see the asset class as being undervalued. The results also show a marked increase in the number of respondents who consider emerging market equities to be undervalued. The number of respondents holding this view rose 11% over the last quarter to 57% of respondents suggesting that unfavourable market conditions linked to the slow-down in China and continued geo-political risks across various markets continue to impact sentiment.

Perceptions of gold have remained broadly unchanged with 33% of respondents seeing the asset class as overvalued and 28% seeing it as undervalued.

Will Goodhart, Chief Executive of CFA UK:
‘When we last canvassed members for their views, the Fed had surprised the market by failing to raise rates and concerns around China were abating. The respondents to this quarter’s survey are feeling less optimistic. Global economic conditions remain weak meaning that there is little prospect of further significant improvement in operational earnings. The current surge in M&A activity looks like a late-cycle indicator and, while markets welcomed the Fed’s rate rise as a small step towards rate normalisation, the flattening in bond yields betrays a lack of confidence in the prospects for growth. In those circumstances, a resumption of concerns about valuations across developed bond and equity markets is unsurprising. Respondents continue to regard emerging market equities as undervalued, but, if our survey had given them the opportunity to say so, they might have commented that there may be significant divergence between different emerging markets’ performance. Those that are more dependent on oil exports and on Chinese growth may find 2016 another challenging year.’