Asset Price Inflation Concerns Growing: Investors Now View Developed Market Equities as Overvalued, Along With Bonds

• CFA UK Valuations Index shows that nearly twice as many investors now believe that developed market equities are overvalued compared to a year ago
• Government bonds continue to be seen as the most overvalued asset class, while emerging market equities are still viewed as undervalued

CFA UK Valuations Index* reveals today that the proportion of UK based investment professionals who believe that developed market equities are overvalued has doubled in the last 12 months. The most recent publication of the CFA Society of the UK’s quarterly survey shows that 47% of respondents rate developed market equities as either overvalued or very overvalued, compared to 26% in Q2 2012. At the same time the proportion of investors viewing the asset class as undervalued or very undervalued as fallen from 39% in Q2 2012 to 22% in Q2 2013.

Government bonds are still regarded as the most overvalued asset class, with 79% of respondents rating them as somewhat overvalued or very overvalued. However, there is a growing trend of corporate bonds becoming increasingly overvalued in the eyes of investors, lending credence to the notion that a bond bubble may be developing; when asked the same question 12 months ago 49% of respondents indicated that corporate bonds were overvalued, compared to 70% now. Similarly 19% of respondents rated corporate bonds as undervalued in Q2 2012 compared to just 10% in Q2 2013.

Opinions on emerging market equities have not changed significantly over the previous 12 months: 26% of investors currently view the asset class as somewhat overvalued or very overvalued, compared to 24% in Q2 2012, while 43% viewed it as somewhat undervalued or very undervalued in Q2 2012 and 44% in Q2 2013.

Investor opinion appears to be divided on the price of gold, which has fallen by almost 24% since reaching its 12 month high in October 2012; the proportion of investors viewing it as undervalued has increased from 16% in Q2 2012 to 26% in Q2 2013 but there are many more investors who expect the commodity to fall further over a 12 month time horizon, with 46% viewing it as overvalued.

Says Will Goodhart, chief executive of CFA UK: “Policymakers are becoming more vocal in expressing concerns about the danger of asset price inflation on the back of quantitative easing. At the same time, markets are starting to show signs of anxiety about the impact that possible QE withdrawal in the US might have on fixed income markets and whether equity markets can withstand this potential headwind. The results of our most recent valuation index reflect that unease, with 79% of respondents seeing government bond markets as overvalued and only 22% of investors seeing value in developed equity markets. That’s a potentially toxic combination of sentiments. While bond markets were regarded as significantly overvalued last year, they were at least balanced by a belief that equity markets were relatively undervalued. There’s been little change in views on bond valuations since last year, but the number of respondents viewing developed market equities as also overvalued has shot ahead.”

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.