Emerging-Bond Rally Seen Spurring Gains in Stocks: Chart of the Day
Emerging-market stocks are poised to rise as falling bond yields make the debt of developing countries less attractive, according to Geoffrey Dennis, a Citigroup Inc. strategist.
The CHART OF THE DAY shows how the so-called earnings yield on the MSCI Emerging Market Index compares with the yield on the JPMorgan EMBI+ Index, a benchmark for emerging-market debt, as Dennis did yesterday in a report. The top panel displays both yields in the past 12 months, and the bottom panel shows the ratio between them.
“Bonds may be in a bubble, equities are not,” Dennis wrote, as the stock-bond yield ratio is relatively high. The indicator, usually less than 1, was at 1.25 yesterday after rising to 1.34 two weeks ago.
The earnings yield has climbed 1.16 percentage points to 7.05 percent this year, according to data compiled by Bloomberg through yesterday. The surge in this gauge, the inverse of the price-earnings ratio, took place as profit growth at emerging- market companies exceeded the MSCI index’s 1.4 percent advance for the year.
Bond yields, on the other hand, have fallen in tandem with declines in developed markets. The yield on JPMorgan’s index hit bottom last month at 5.40 percent, the lowest reading since at least 1997, according to Bloomberg. Yesterday’s 5.63 percent yield translated into a 0.97-point decline for the year.
Dennis, who specializes in global emerging-market strategy, reiterated his view that share prices are likely to rise in the fourth quarter. Stocks are “very reasonable” by comparison with earnings estimates and asset values, he wrote.
(To save a copy of the chart, click here.)
To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net
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