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 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 EMB are now looking rich compared to emerging stock funds like EEM:
And in the Latin markets that JPMorgan focused on, a regional bond fund like BONO seems very rich indeed compared to its stock counterpart GML: