The bearish tone chimes with the opinion of several notable managers and experts who have recently spoken with FE Trustnet.
The likes of JP Morgan’s Bill Eigen (pictured) and Hargreaves Lansdown’s Mark Dampier are nervous about heightened risks in the bond market while investors such as Investec’s Alastair Mundy cite the relative expense of developed market equities.
Polled between 17 February and 9 March 2015, analysts and investors responding to the CFA Society survey indicated “an overwhelming consensus” that both sovereign and corporate bonds are overvalued, particularly highlighted by the current negative yields of some government bonds.
In fact, government bonds were said to be the most overvalued asset class in the market while the results also suggest a perceived lack of value in developed market equities, with more than half of investment professionals saying they are too expensive relative to their historic value.
More than four out of five said government bonds are the most overvalued asset class, while the number viewing them as undervalued or very undervalued more than halved since the fourth quarter of 2014 to just 3 per cent.
The proportion of investment professionals that said corporate bonds are generally overvalued has reached its highest level since the index was introduced three years ago with 76 per cent declaring corporate bonds as overvalued, an 11 per cent increase on the first quarter of 2014.
Also, the amount who think corporate bonds are undervalued has plummeted to its lowest level since the index began, halving year on year to 5 per cent.
The results, while stark, are perhaps not surprising as both government and corporate bonds have rallied over the long term as shown below.
The market for gilts and UK corporates bonds has continued upwards as far back as our data goes with only the corporate index seeing a substantial wobble over this period. In 2008 it lost around 16.7 per cent before quickly catching up in 2009.
According to FE Analytics, the iBoxx UK Sterling Corporate All Maturities and iBoxx UK Sterling Gilts All Maturities indices have gained 204.59 per cent and 192.62 per cent since 1998.
Performance of indices since 1998
Source: FE Analytics
A substantial shift of the view of valuations in developed market equities was also apparent in the survey.
The amount of respondents who regard these stocks as overvalued has leapt 10 percentage since the last quarter of 2014 to 52 per cent, whilst the number who see them as undervalued has fallen from 23 per cent to 18 per cent.
Developed world stocks have also rallied hard since the bottom of the stock market falls prompted by the onset of the financial crisis, especially in the US and UK as shown below.
Performance of indices over six years
Source: FE Analytics
The FTSE 100 last week smashed through its ‘psychological’ 7,000 points barrier and the NASDAQ is a surging at a 15-year high and close to an all-time high set in the dot com era.
FE Alpha Manager Luke Newman, who runs the top-rated Henderson UK Absolute Return fund, says he expects his short positons to generate most of his fund’s returns this year due to high valuations.
In contrast, emerging market equities were the only asset class largely regarded as undervalued in the CFA Society survey with 43 per cent of investment professionals holding this view. However this has fallen sharply - by 16 percentage points - year-on-year.
Following a torrid few years emerging markets have seen reasonable upside over the past 12 months mainly driven by its Asian components, particularly India. The MSCI Emerging Market index has gained 16.88 per cent over the past year, albeit in a modestly volatile fashion.
Performance of index over 1yr
Source: FE Analytics
Indeed, those emerging market funds with high exposure to India such as Carmignac Emerging Markets have done particularly well over the past year, returning the most in the IA Global Emerging Markets sector over this time.
Will Goodhart, chief executive of CFA UK, says sentiment suggests that investment professionals see the search for returns as becoming even more challenging over the near to medium term, due to the substantial but diminishing effects of quantitative easing (QE) by the leading central banks since 2008.
“QE has supported increases in asset values by depressing the rate at which future cash flows are discounted and by encouraging growth thereby improving the outlook for earnings,” he said.
“Our most recent survey’s results suggest that investment professionals feel that the prospects for additional benefits from QE may be limited.”