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Investors see greater value in Developed Market Equities following China sell-off

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The results of the latest Valuations Index from the CFA Society of the UK (CFA UK) show that the proportion of respondents who view Developed Market Equities as undervalued has more than doubled, whilst the number who view them as overvalued has fallen sharply.

This swing suggests that Developed Markets may be stabilising following the recent market volatility. The number of investment professionals surveyed who regard Developed Market Equities as overvalued has fallen below 50 per cent for the first time in 2015, dropping from 61 per cent in Q2 to 47 per cent in Q3. Similarly, those polled who view Developed Market Equities as undervalued has risen to 22 per cent, up from 10 per cent in the last quarter.
Although investors’ perception of both Corporate and Government bonds overwhelmingly suggests that they are still overvalued, there are some signs that this view is easing slightly with those viewing Government bonds as overvalued falling nine per cent, from 79 per cent to 70 per cent, and those who consider Corporate Bonds as overvalued falling from 74 per cent to 66 per cent.
According to those surveyed, Emerging Market Equities continue to be widely considered as undervalued, with respondents’ views remaining broadly flat. Similarly, perceptions of Gold have seen little change in the past quarter, although the proportion that consider it overvalued has risen marginally from 30 to 33 per cent. Equally, the perception that the asset class is undervalued has seen a slight uptick from 22 to 26 per cent.
Says Will Goodhart (pictured), chief executive of CFA UK, says: ‘The recent sell-off in equities was prompted by fears of weaker growth in China and the repercussions for other economies. The Federal Reserve’s subsequent decision to hold US interest rates where they are, rather than raise them, was based in part on their view that weak economic conditions globally would restrain inflation. The Fed’s statement said that ‘economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal’. In these circumstances, respondents’ significantly changed views about valuations in developed market equities and, to a lesser extent in bond markets, are less surprising than they might at first seem’.

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