CFA UK has 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 per cent) now consider emerging market equities fairly valued, an increase of 11 per cent since Q4 2018. This rise corresponds directly to an 11 per cent 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 USD998 to USD1051 over the same period.
Moreover, 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 per cent of respondents saw corporate bonds as overvalued in the last survey, 73 per cent 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 per cent, from 16 per cent at the end of 2018 to 19 per cent this quarter.
This changing outlook on bonds follows a strong rally in prices in 2019. Corporate bond yields dropped from 2.2 per cent in Q4 2018 to 1.89 per cent in Q1 2019 and government bond yields similarly declined from 1.75 per cent to 1.57 per cent 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 per cent) still see the asset class as overvalued but this figure represents a 4 per cent 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 per cent) to 82 per cent.[2] 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 per cent in Q4 2018 to 14 per cent this quarter.
Will Goodhart (pictured), chief executive of CFA UK, says: “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.”
