Perceptions of bond bubble continue to ease

Sunday 27 March 2016

  • Perceptions of Government and Corporate Bonds being overvalued ease, following uptick in Q4 2015
  • Perception of Developed Market Equities as overvalued falls to near two-year low
  • Emerging Market Equities continue to be seen as undervalued

The latest Valuations Index from the CFA Society of the UK (CFA UK) saw a significant drop in the proportion of investors who view bonds as being overpriced (from 79% to 67%) and a similar sharp fall in those who regard corporate bonds as overvalued (from 73% to 58% - the lowest figure in three years). However, while there has been a substantial change in the proportion of respondents regarding corporate bonds as undervalued (up to 16% from 6% three months ago), there has been much less change in the number of those that regard government bonds as undervalued (up to 8% from 5%).

Developed market equities similarly saw a marked shift in attitude from respondents, with those who regard the asset class as overvalued falling 12% to 40%. Meanwhile, those who viewed them as undervalued doubled from 13% to 27%.

Respondents continued to see emerging market equities as undervalued, with perceptions experiencing little change over the last quarter. Similarly perceptions of gold remained broadly flat, almost equally split between those who see the class as undervalued and those that think it is overpriced.

Says Will Goodhart, Chief Executive of CFA UK:
These changes in perception around value in both the bond and equity markets are significant. Both follow periods in which those markets have recovered much of the value that they held towards the end of last year. While most respondents continue to be concerned that bond valuations are pricing in too long a period of low interest rates, a growing number of respondents appear now to believe that we may be entering a sustained period of close to zero or falling real interest rates. Equally, some respondents appear to believe that, despite the recent rebound, equity markets may still offer value. That said, it is important to remember that most respondents believe that equity and bond markets are overvalued. While there may have been falls of around 40% in the number of respondents who regard bond and equity markets as very overvalued, rather than just somewhat overvalued, this remains a time for caution.