Bond bubble easing was ‘only temporary’, professionals suggest

City of LondonMany more UK investment professionals perceive bonds to be overvalued than they did in the third quarter of 2015, while over half also see developed market equities as too expensive.

The Valuations Index from the UK CFA Society, a professional awards body, shows the proportion of members who consider government bonds as overvalued has risen by nine percentage points to 79%, while the number who consider corporate bonds to be overvalued has risen seven percentage points to 73%.

The increase follows a marked decline in this sentiment recorded by the Valuations Index in the third quarter of 2015 and CFA UK says the latest finding may suggest that the feeling back then that the bond bubble may be easing was only temporary.

The organisation surveyed its members about market sentiment in December. Other findings were:

  • 52% regard developed market equities as overvalued, while 13% see the asset class as being undervalued
  • an increase in the number of respondents who believe emerging market equities to be undervalued, with this view rising by 11 percentage points to 57%
  • Perceptions of gold remain broadly unchanged, with 33% of respondents seeing the asset class as overvalued, and 28% seeing it as undervalued

“When we last canvassed members for their views, the [Federal Reserve] had surprised the market by failing to raise rates and concerns around China were abating – respondents to this quarter’s survey are feeling less optimistic,” says Will Goodhart, chief executive of CFA UK.

“Global economic conditions remain weak, meaning there is little prospect of significant improvement in operational earnings,” Goodhart adds. “The current surge in M&A activity looks like a late-cycle indicator. While markets welcomed the Fed’s rate rise, the flattening in bond yields betrays a lack of confidence in the prospects for growth. In those circumstances, a resumption of concerns about valuations across developed bond and equity markets is unsurprising.”

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