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Will Goodhart, CFA UK

Investors’ outlook on bonds improves as market volatility increases, says CFA UK survey

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CFA UK’s latest quarterly Valuations Index, measuring investors’ perceptions of the value of equities, bonds and gold in Q4 2018, reveals a positive shift in investors’ outlook on both government and corporate bonds, which have consistently been perceived as overvalued by the majority of investors in recent quarters.

The proportion of investors who believe government bonds are overvalued has dropped since Q3 2018, from 67 per cent to 61 per cent. Likewise, the severity of overvaluation identified by respondents has also calmed. Among those identifying overvaluation, only 16 per cent noted that government bonds were “very overvalued” in Q4 2018, compared to 24 per cent in the previous quarter.
 
While corporate bonds are still considered worse value than government bonds, perceptions of their overvaluation have also declined. Whereas a total of 76 per cent saw corporate bonds as overvalued in Q3 2018, 69 per cent now believe this to be the case.
 
These results – collated in December based on asset values in late November – indicate a risk-off mentality among investors in the face of continued market uncertainty.
 
Respondents’ views on developed market equities, which have been edging towards increasing overvaluation in the long term, improved slightly quarter-on-quarter. Sixty-five per cent of respondents noted that this asset class was overvalued in Q3 2018 but this proportion has now declined to 61 per cent.
 
Nevertheless, the risk-off trend continued, with December proving to be a very poor month for global market equities.
 
The survey results indicate that, should equity markets recover, we might see opportunities for improvement in emerging market equities’ valuations. Similar to the last quarter, more than half (52 per cent) of the survey respondents believe emerging market equities are either “very undervalued” or “somewhat undervalued”, with an additional 22 per cent seeing fair value in the asset class. This follows their recent under-performance. In spite of that underperformance, there was also a six per cent increase in the proportion of respondents seeing emerging market equities as “somewhat overvalued” over the same period.
 
Gold meanwhile remains a popular choice as investors continue to look to safe haven assets. Eighty-six per cent of investors polled said they perceive gold as either fairly valued or undervalued, the highest proportion since the Valuations Index was launched in Q1 2012.
 
Will Goodhart (pictured), chief executive of CFA UK, says: “We have been experiencing rising market volatility in the last two quarters and, given this, it is understandable that we are seeing trends towards bearishness and de-risking among investors at the moment. Our members’ perceptions of bonds have improved and there have only been minor changes in investor sentiment towards equities and gold.”
 

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