How Will the Divergence in Emerging Markets Assets Resolve Itself?
Typically emerging market (EM) assets trade closely together as investors look at their EM exposure holistically as an asset class by itself, as opposed to differentiating strongly between credit, equity or currency risk. However, the decoupling of fixed income and equities, which we have noted in developed markets, can also be seen in EM assets. Our chart looks at the total yield on an index of EM government bonds and compares its recent history to the forward-looking (12 months) earnings yield of stocks in the MSCI EM index. This comparison reveals how the earnings yield has continued to decline as equities have continued their rally and is now low relative to its level over the last five years. Yet the bond yield has remained stable at the upper end of its range over this time period. How the situation resolves itself – a further leg down in bond yields or rise in earnings yield – will depend squarely on how the macro environment in EM economies evolves going forward.
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