Growing Concern Over Asset Price Inflation

U.K. investors and analysts think government and corporate bonds and developed-market equities are all overvalued right now.

In a May member survey by the CFA Society of the United Kingdom, 755 analysts and investors indicated that they think assets in almost every class are overvalued. The asset class rated as overvalued by the most respondents is government bonds (79 percent), followed by corporate bonds (70 percent). These numbers are up from a mid-2012 survey in which 73 percent of respondents thought government bonds were overvalued and only 51 percent had the same opinion about corporate bonds. Most notably in these categories, the proportion of respondents who think corporate bonds are “very overvalued” jumped from 8 percent to 28 percent over the past year. The CFA Society of the U.K. sees this result as suggesting that a bond bubble is developing.

Even harder hit in the poll were developed-market equities, which 38 percent of respondents described as “overvalued” and 9 percent said are “very overvalued” (vs. 22 percent and 2 percent, respectively, in mid-2012). And although the price of gold has fallen substantially since late 2012, far more respondents still consider gold to be overvalued (46 percent) than undervalued (26 percent).

“Policymakers are becoming more vocal in expressing concerns about the danger of asset price inflation on the back of quantitative easing,” says Will Goodhart, chief executive of the CFA Society of the U.K. “At the same time, markets are starting to show signs of anxiety about the impact that possible quantitative easing withdrawal in the U.S. 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. While bond markets were regarded as signficantly 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.”

062013-Asset Valuation

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