Hunt for yield favours developed equities and emerging bonds
In this monthly report, we outline our proprietary risk premium for 27 developed and 23 emerging markets in the Americas, Europe, Africa, Asia, Australia and New Zealand.* What returns should investors expect from financial assets? The key question in the current market environment is what return investors should expect over the medium to long term from equity and government bonds. With this report and our proprietary risk premium tools, we provide a framework for estimating potential return over the next ten years (see page 3).
* Expect sub-par equity and bond market return globally. We use our proprietary cost of capital (equity) to gauge equity market return. Our analysis suggests that the current cost of capital is below the historical average for most countries (see page 3). This indicates that the equity return going forward should be below average and in the single-digits for most developed countries.
* Equities still offer better value than government bonds, especially in developed markets. Thanks to low bond yields, despite a lower cost of capital, the equity risk premium remains attractive in most developed countries. With dividend yields higher than bond yields in most developed countries, long-term investors should prefer equity over government bonds (see page 4).
* Hunt for yield favours developed equity and emerging bonds. Within developed equity markets, the euro area, the UK and Canada offer a higher cost of capital. Within emerging markets, India offers good combination of high return and stable currency. Government bonds offer better value in Brazil, South Africa and Russia.