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Riskier Emerging Stocks Best Bet to Barclays: Chart of the Day

EM vs DM Risk Premium

Emerging-market stock valuations are flashing a buy signal to Barclays Plc.

The CHART OF THE DAY shows in orange the real yield on emerging-nation equities is close to the highest relative to developed-country shares since 2010, according to data compiled by Barclays. The blue line shows that when the emerging-market premium approached similar levels in the past, total returns surpassed developed counterparts in the following 12 months.

“The yield gap shows investors are more risk-averse toward emerging versus developed markets than was the case in history,” Dennis Jose, a global and European equity strategist at Barclays in London, said by phone July 2. “Emerging-market equities are performing better than developed-market equities as they’re cheaper, and there’s still room for growth.”

The MSCI Emerging Market Index outperformed the MSCI World in the second quarter for the first time since 2012. The outperformance is set to continue as earnings growth recovers in export-oriented nations, including India, Korea and Taiwan, Jose said.

Barclays worked out the real yield gap by taking the earnings per share, or the company’s income divided by the stock price, and then subtracting the real bond yield for emerging or developed markets. It then calculated the difference to isolate the risk priced into emerging-market equities.

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