Emerging-Market View Favors Stocks Over Bonds: Chart of the Day

Emerging-market stocks are more appealing than the debt of developing countries after their struggle to advance this year, according to Pierre Lapointe, Brockhouse & Cooper Inc.’s global strategist.

The CHART OF THE DAY shows how the MSCI Emerging Markets Index, consisting of stocks from 21 countries, has performed by comparison with a global index of developing-country bonds. The chart begins in 2000, when JPMorgan Chase & Co. began compiling the bond barometer, and tracks the difference in yield between the debt securities and U.S. Treasuries.

Share prices have swung between gains and losses all year, leaving the MSCI Index with a 0.3 percent total return through July 13. JPMorgan’s index returned 5.4 percent during the same period, thanks to a five-month rally in emerging-market bonds. The figures reflect dividend and interest payments as well as price changes.

Stocks have better prospects, Lapointe and economist Alex Bellefleur wrote yesterday in a report, because rising sales and dividends are likely to bring higher price-earnings ratios. The MSCI index is valued at 12.2 times reported profit, below an average of 16.7 since 1995, according to Bloomberg data.

“There is little room for spreads to tighten further,” they wrote, which may curtail any bond gains. As the chart shows, the yield gap two days ago between the JPMorgan index and Treasuries was 300 basis points, well below the peak of 852 basis points in October 2008. Each basis point equals 0.01 percentage point.

Shares of companies based in emerging markets are poised to produce average annual returns of about 10 percent for the next seven years, according to the report. Developing-country bonds yield about 6 percent, based on JPMorgan’s data.

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