Emerging-market equities will offer better returns than bonds this year, handing investors as much as 15 percent, as economic growth boosts risk appetite, Royal Bank of Scotland Group Plc’s wealth management unit said.
Economic growth of more than 5.5 percent in emerging markets, China’s recovery and the availability of cash globally will support equities this year, Gary Dugan, Coutts & Co.’s chief investment officer for Asia and the Middle East, said at a news conference in Dubai today. A bond price rally, which gave the best returns last year, is set to fade as the prospect of higher long-term interest rates trims returns, he said.
There is a “much more consistent growth story now developing around the world and it is a much better foundation for people to take risks,” Dugan said. “Equities are preferred over bonds and it is emerging that are preferred” within that category, he said, adding stocks will probably be the best-performing asset class this year.
Emerging-market bonds rallied last year, with the JPMorgan Chase & Co. Emerging Markets Bond Index returning 19 percent, according to data compiled by Bloomberg. The MSCI Emerging Markets Index of equities gained 15 percent in 2012, having lost 20 percent a year earlier, data compiled by Bloomberg show.
Chinese shares and Japanese technology and pharmaceutical industries will probably provide the best returns this year, Dugan said. China’s gross domestic product grew 7.9 percent in the final three months of 2012, the first acceleration in eight quarters, while U.S. companies expanded headcount by 157,000 in January as the job market made further strides.
Risks to equity-market performance include Iran’s nuclear program, the debt crisis in Italy, Spain and Greece, and U.S. budget negotiations, Dugan said.
Equity markets may be considered expensive now, but they are cheap relative to bonds and will be supported by government cash injections globally, Dugan said. The S&P 500 Index in the U.S. trades at 13.7 times estimated 2013 earnings, according to data compiled by Bloomberg.
Global banks are expanding their presence in the Middle East to tap a growing number of wealthy clients. The number of millionaires in the Middle East rose 2.7 percent in 2011 to 450,000, according to a Capgemini SA and RBC Wealth Management report in June.
Coutts, which has regional offices in Abu Dhabi and Dubai in the United Arab Emirates, as well as in Doha, Qatar, has hired 20 more bankers for its Middle East business and plans to add another 11 this year, Amir Sadr, co-head for Coutts in the Middle East, said at today’s conference.