Equities are cheap relative to bonds across the board, with emerging market equities giving the best value compared to the same set of bonds, according to research from Societe Generale’s Global Asset Allocation team. They currently recommend that people put their money into equities instead of government bonds.
Societe Generale prefers equities over bonds
The report from Societe Generale SA (EPA:GLE) says that they “prefer equities over bonds in the four developed countries. Equity allocation in a mixed equity and bond portfolio ranges from 69 percent (U.K.) to 99 percent (Germany). This is driven mainly by relatively high equity risk premiums and low realized volatility. Such a level is consistent with our cautious stance on government bonds.” Unsurprisingly, the risk premium is higher for emerging markets than for developed ones, though this doesn’t necessarily account for the actual risk involved.
Above-average global earnings growth expected to drop
Global earnings growth is above the historical average—13 percent compared to 7.9 percent—but it is expected to drop slightly over the next two years. The risk premium on bonds is 5.2 percent with a ten-year bond payout average of 2.9 percent and a payout ratio of 35.8 percent.
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Developed markets’ earnings growth will closely track global growth, hitting 13 percent this year and falling at the same rate in 2014 and 2015, although developed markets have a lower historical average (7.5 percent). The risk premium is slightly lower at 5.0 percent, while the 10-year bond yield is 2.5 percent and the payout ratio is 38 percent.
Emerging market earnings growth is below the historical average this year, 11 percent versus 12.2 percent, but it will grow to 13 percent in 2014, then fall back to 10 percent in 2015. The risk premium for emerging market equities is 6.7 percent, the ten-year bond yield is 5.6 percent, and the payout ratio is 35.8 percent.
The U.S. has lower earnings growth than other developed markets—just 7 percent this year and 10 percent for the next two years, according to Societe Generale’s research—versus a historical average of 8.6 percent. The current risk premium on U.S. equities is 4.8 percent and the 10-year bond yield is 2.7 percent, while the payout ratio is 33.1 percent.