Finding bonds with attractive yields in both the high-yield and investment-grade space, and attractively priced equities with ‘bond like’ qualities is becoming an increasingly difficult task for investors (this is similar to a theme Morgan Stanley recently expressed). Yields across the board have plunged since Brexit with $1 trillion in bonds falling into negative yielding territory in the week following the June 24 referendum.
Equity analysts at Bank of America believe that the world has now finally accepted that low-interest rates are here to stay, in this slow nominal growth world. As a result, the bank is recommending Asia/emerging market equities as the ‘least bad’ option for equity investors to add alpha as the monetary easing experiment has failed to generate growth and inflation in Europe and Japan. The US is growing, but the countries equity market appears expensive at 13.2x EV/EBITDA — the 90th percentile since 1995.
EM equities a good substitute for low-yield bonds?
For the past ten years, analysts on Wall Street have been consistently trying to over-predict global/US bond yields—especially since the financial crisis. Consensus estimates layered on a chart (see below) of the US 10-year Treasury yield, shows just how far out the consensus has been for the past decade.
Since 2005, there has been only one period (mid-2012 to the end of 2014) when the consensus has underestimated yield forecasts. There has also only been one period when the consensus was able to predict Treasury yields accurately going forward, and that was in the 2009/2010 period.
Now, it seems analysts have finally accepted the fact that yields will be lower for longer. The consensus 10-year bond yield forecast has come down significantly since the beginning of 2016 and is predicting a 10-year yield of between 2% and 1.8% 12 months out.
Could Asian/EM equity markets be a yield haven for investors?
Bank of America’s data pack indicates that there are some markets which might be more attractive to yield seekers in emerging markets than low yielding treasuries and overbought US equities.
For example, the Czech Republic equity market currently supports a dividend yield of 6.6%, and trades at a forward P/E of 12.9, 7.5% above its ten-year average. Russia’s equity market yields 4.7% and trades at a P/E of 5.8, 11% below its ten-year average. Qatar’s equity market yields 4.5% on average and trades at a P/E of 11.8, 10.8% below its ten-year average valuation. The markets of Singapore and Taiwan yield 4.3% and trade at average P/Es of 11.9 and 12.8 12.2% and 9.1% below ten-year averages respectively. Finally, the market of the UAE supports a dividend yield of 4.6% and trades at a P/E of 11.4, 12.4% below its ten-year average.