Global equities and bonds increasingly viewed as overpriced as uncertainty pervades markets

Wednesday 17 August 2016

  • Perception of equities and bonds as overvalued rises in Q2 2016
  • Perception of Developed Market Equities as overvalued rises sharply to highest level in four years
  • Record low yields correspond to a marked rise in the perception of government bonds as overvalued

Perceptions of Developed Market equities as overpriced saw their sharpest rise in four years, climbing from 40% to 62% in the last quarter: a 22% increase. The number of respondents that viewed the asset class as overvalued is at the highest level seen in the four and a half year history of the CFA UK’s Valuations Index, reflecting the uncertainty pervading developed markets in light of the UK’s vote to leave the European Union and the expectation of a bitterly contested U.S. Presidential Election.
The effect was more muted in Emerging Market equities, which saw a 3% rise in those surveyed who view them as overvalued to 22%, a reflection of the asset class’s relative insulation from the volatility affecting developed markets.

Sovereign debt yields fell to their lowest levels in recent years as investors flocked to safe haven assets. As a consequence, the perception of government bonds as overvalued rose from 67% to 75%, erasing the perception in Q1 that government bonds were approaching fairer valuations. Perceptions of Gold, another safe haven asset, as overvalued have also increased, with the proportion of respondents viewing the asset class as overvalued climbing to 39%, its highest level since 2014.
69% of those polled also saw Corporate Bonds as overpriced, up 11% from last quarter, with a corresponding drop in the number of respondents that saw the asset class as undervalued from 16% to 9%.

Says Will Goodhart, chief executive of CFA UK: “Our survey respondents are clearly feeling pretty anxious. It’s hard to blame them. Political risks have come to the fore and the economic outlook is uncertain. As the G20 recently observed, the global economic recovery is continuing, but remains ‘weaker than desirable’. Against this backdrop, bond yields continue to fall and the US and UK equity markets stand at or close to year-long highs. The shift back towards a perception of developed market equities being overvalued is unsurprising. The extent and speed of that shift however was somewhat unexpected.”

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.