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Emerging-Market Equities to Outperform Bonds, JPMorgan Says

Emerging-market bonds will underperform developing-nation equities next year as U.S. Treasury yields rise, according to JPMorgan Chase & Co.

Bond returns are likely to be between 4 percent and 8 percent in 2011, compared with 25 percent for developing-country equities, Joyce Chang, the head of emerging-market research at JPMorgan in New York, wrote in a note dated Nov. 29.

Local-currency debt will probably return 8.3 percent next year as the extra yield investors demand to own developing-nation governments’ dollar bonds over U.S. Treasuries declines by about 70 basis points, she wrote. The yield on U.S. 10-year notes will rise to 3.45 percent by the end of 2011, she wrote, compared with 2.9 percent today.

Falling U.S. Treasury yields driven by U.S. monetary-policy easing have propelled emerging-market bond performance this year, with the JPMorgan EMBI Global index returning 12.4 percent so far in 2010. The U.S. Federal Reserve’s plan to buy $600 billion worth of Treasury bonds has been the “major driver of markets” since August, according to JPMorgan.

“After posting 13 percent year-to-date returns in 2010, it will be a struggle for emerging-market fixed-income assets to generate even half that return in 2011,” Chang wrote, adding that investors were asking themselves “whether 2011 will be the year of outperformance by emerging-market equities rather than emerging-market fixed income.”

GDP Growth

Developing economies will expand 5.9 percent as a group in 2011, she wrote, and debt issuance by emerging-market companies and governments will fall to $240 billion next year from $280 billion in 2010.

The bank’s EMBI Global Index tracking the so-called yield spread on emerging-market bonds will fall to 250 basis points from 322 yesterday, Chang said. The spread on the CEMBI Broad Index of emerging-market corporate bonds should fall to 260 basis points by the end of 2011 as emerging-market corporate debt outperforms bonds sold by developed nation companies, she said. The spread was 323 basis points yesterday.

The CEMBI Broad Index will probably return 6.5 percent during 2011, Chang wrote.

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