Emerging Stocks Seem Undervalued On A Yield Basis (SPY, EMB, EEM, GML, BONO)

Tim Seymour:  Everyone has been talking about how cheap emerging-market equities look after the recent sell-off. This is also true when you compare them to emerging-markets bonds. 

As we know in the United States, dividend yields on the S&P 500 briefly moved up to 2.32% on August 12, higher than 10-year Treasury yields for the first time since the 2008 credit crash.

Before that, you would have to go back to the recession of 1958 to see a similar scenario.

Since then, Treasury yields have edged up to 2.19% and recovering stocks have pushed the SPDR S&P 500 ETF (NYSE:SPY) yield back down to 1.69%, but the signal has fed a lot of the bargain buying we have seen over the last few weeks.

But a similar story has played out in emerging markets as well. JPMorgan is leading the charge here, pointing out that Latin corporate bonds have seen so much new investment this month — also from a nervous safe-havens bid — that this asset class is now looking rich compared with Latin stocks.

In general, emerging equities now trade at about 9.9 times forward earnings versus an implied 16.1 times forward earnings for emerging credit.

There will always be a safety premium build into bonds, but this earnings gap between emerging stocks and emerging debt is now twice its long-term average.

What this boils down to is a strategic suspicion that emerging bond funds like the iShares JPMorgan USD Emerg Markets Bond ETF (NYSE:EMB) are now looking rich compared to emerging stock funds like iShares MSCI Emerging Markets Index (NYSE:EEM):

And in the Latin markets that JPMorgan focused on, a regional bond fund like Market Vectors LatAm Aggregate Bond ETF (NYSE:BONO) seems very rich indeed compared to its stock counterpart SPDR S&P Emerging Latin America ETF (NYSE:GML):

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

Leave a Reply

Your email address will not be published. Required fields are marked *