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Asset price inflation concerns growing, says CFA UK


The proportion of UK-based investment professionals who believe that developed market equities are overvalued has doubled in the last 12 months, according to the CFA UK Valuations Index.

The most recent publication of the CFA Society of the UK’s quarterly survey shows that 47 per cent of respondents rate developed market equities as either overvalued or very overvalued, compared to 26 per cent in Q2 2012. At the same time the proportion of investors viewing the asset class as undervalued or very undervalued as fallen from 39 per cent in Q2 2012 to 22 per cent in Q2 2013.
Government bonds are still regarded as the most overvalued asset class, with 79 per cent 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 per cent of respondents indicated that corporate bonds were overvalued, compared to 70 per cent now. Similarly 19 per cent of respondents rated corporate bonds as undervalued in Q2 2012 compared to just 10 per cent in Q2 2013.
Opinions on emerging market equities have not changed significantly over the previous 12 months: 26 per cent of investors currently view the asset class as somewhat overvalued or very overvalued, compared to 24 per cent in Q2 2012, while 43 per cent viewed it as somewhat undervalued or very undervalued in Q2 2012 and 44 per cent in Q2 2013.
Investor opinion appears to be divided on the price of gold, which has fallen by almost 24 per cent since reaching its 12 month high in October 2012; the proportion of investors viewing it as undervalued has increased from 16 per cent in Q2 2012 to 26 per cent in Q2 2013 but there are many more investors who expect the commodity to fall further over a 12 month time horizon, with 46 per cent viewing it as overvalued.
Will Goodhart, chief executive of CFA UK, says: “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 per cent of respondents seeing government bond markets as overvalued and only 22 per cent 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.”

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