Investors see less buying appeal in emerging markets and bonds, according to CFA UK survey

Tuesday 7 May 2019

One third of investors polled now consider emerging market equities fairly valued
Outlook on bonds becomes more divided and worsens after more positive views in Q4 2018
View on developed market equities improves, with perceptions of overvaluation decreasing

Tuesday 7 May 2019 – CFA UK today released the results of its latest quarterly Valuations Index, measuring investors’ perceptions of the value of equities, bonds and gold in Q1 2019. 

The index reveals multiple changes in investors’ views of core asset classes since the previous quarter, with less buying appeal seen in emerging market equities and bonds.

After a period of underperformance of emerging market equities last year, the latest results reflect a perceived value correction of the asset class and overall sentiment shifting in favour of seeing fair value. Approximately one third of investors polled (33%) now consider emerging market equities fairly valued, an increase of 11% since Q4 2018.  This rise corresponds directly to an 11% quarter-on-quarter decrease in the proportion of respondents deeming emerging market equities undervalued, while the proportion of those seeing overvaluation remained comparable. The value of emerging market equities increased from $998 to $1051 over the same period. 

Moerover, investors’ outlook on bonds has become more divided and worsened again slightly after a positive shift between Q3 and Q4 2018. Perceptions of corporate bond overvaluation are on the rise again; while 69% of respondents saw corporate bonds as overvalued in the last survey, 73% of respondents believe this to be the case in Q1 2019. 

Likewise, while government bonds continue to be seen in a better light than corporate bonds, six in ten investors still consider them overvalued and the severity of overvaluation has worsened since Q4 2018 in respondents’ opinions. The proportion of investors seeing government bonds as “very overvalued” increased 3%, from 16% at the end of 2018 to 19% this quarter.

This changing outlook on bonds follows a strong rally in prices in 2019. Corporate bond yields dropped from 2.2% in Q4 2018 to 1.89% in Q1 2019 and government bond yields similarly declined from 1.75% to 1.57% between the quarterly surveys. A greater global economic slowdown may see the yields drop further.

On the other hand, investors’ views of developed market equities have improved slightly quarter-on-quarter. Overall sentiment continues to point to relative overvaluation and more than half of respondents (57%) still see the asset class as overvalued but this figure represents a 4% decrease from Q4 2018. Major developed markets have now partially recovered from the correction that occurred in Q3 2018, though values are still lower than the peaks of 2018. 

Meanwhile, the proportion of investors seeing gold as either undervalued or fairly valued has declined from an all-time high last quarter (86%) to 82%.  According to the survey, few investors see the asset as “very overvalued”, but the proportion of respondents considering it “somewhat overvalued” has jumped by almost two thirds, from 9% in Q4 2018 to 14% this quarter. 

Says Will Goodhart, chief executive of CFA UK: “The results of our survey reflect a less promising outlook from investors than last quarter. Our members have identified greater overvaluation of bonds than at the end of last year, and their views on emerging market equities are more divided. These are difficult times for investors, with equity and bond prices recently falling and rising together, and continuing concern about the global economy slowing. Since this survey was taken, uncertainty around Brexit and fears of a US recession have also taken a toll on market valuations and are impacting investors’ decisions. That said, the reduction in perceived overvaluation of developed market equities is encouraging.” 

Notes to editors: 

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About the Valuations Index

The Q1 2019 Valuations Index survey closed on 18 March 2019. Investors polled were asked to give their perceptions based on the following values: developed market equities (represented by MSCI Developed Market Index), $ 2085.84 at close 1 March 2019; emerging market equities (represented by MSCI Emerging Markets Index), $ 1050.95 at close 1 March 2019; government bonds (represented by J.P. Morgan Global Government Bond Index), yield 1.57% at close 1 March 2019; corporate bonds (represented by S&P International Corporate Bond Index), yield 1.89% at close 1 March 2019; and gold (represented by the London spot fix), $ 1293.44 at close 1 March 2019. The survey was open to all CFA UK members and there was a total of 150 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 12,000 investment professionals in the UK.