Changing investor valuation perceptions
When equity market volatility strikes, investors often flee to safety in the form of bonds.
Fixed income securities (bonds) are traditionally seen as a less risky asset class than equities, although their value can also go down as well as up.
In recent years, the prospect of Central Banks hiking interest rates has made bonds a less attractive proposition. This is because bond yields have a negative correlation with bond values; rising interest rates tend to result in capital losses within a bond portfolio.
Despite this bond pessimism due to the threat of rising interest rates, recent experiences of equity market volatility appears to have prompted a shift in the outlook for this asset class.
The changing perception of bonds is reported in the latest edition of the CFA UA Quarterly Valuations Index. This aims to measure investor perception of the value of equities, bonds and golds.
The latest index, which reported on a reading taken in the final quarter of last year, shows a positive shift in outlook for both government and corporate bonds.
Before this latest report, both investment asset classes had been perceived as overvalued by the majority of investors.
More recently however, investor perception of government and corporate bond valuations has become more favourable.
CFA UK reports that the proportion of investors who believe government bonds are currently overvalued fell from 67% in the third quarter to 61% in the fourth quarter of 2018.
The degree of this overvaluation has also shifted, with only 16% now reporting that government bonds are “very overvalued”, compared with 24% claiming the same in the previous quarter.
In comparison, those investors surveyed for this index reported that corporate bonds remain worse value than government bonds. However, perceptions around their overvaluation have also declined in the quarter.
76% of investors believed that corporate bonds were overvalued in the third quarter, falling to 69% in the fourth quarter of 2018.
The results of this survey were collated in December and based on asset values in late November. According to CFA UK, they indicate a ‘risk-off’ mentality for investors during a period of investment market uncertainty.
Turning to other investment markets, investor views about developed equity markets also improved slightly quarter-on-quarter. 61% of investors surveyed now believe this asset class is overvalued, falling from 65% in the previous quarter.
More than half of survey respondents said emerging market equities are either “very undervalued” or “somewhat undervalued”, with an additional 22% of investors claiming fair value in the emerging market equities asset class.
These views follow a period of underperformance for emerging market equities.
Another popular safe haven choice for investors during periods of equity market volatility is gold.
Gold was claimed by 86% of investors are being either fairly valued or undervalued in the last quarter; this is the highest proportion claiming fair value for gold since the index was launched at the start of 2012.
Will Goodhart, chief executive of CFA UK, said:
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.
Whilst not intended to provide a bellwether for the investment climate, this research offers an interesting insight into the views of professional investors.
It’s worth noting that, over longer periods of time, all investment assets tend to offer fundamental value.
Despite this efficient markets hypothesis, it seems likely that, at some points in time, markets can temporarily depart from fundamental value and offer investors opportunities.