Where To Look For Yield?

The move lower in bond yields over the past quarter has been significant: US real yields recorded their biggest quarterly drop since 2011 (-60bps); global nominal yields reached a record low earlier this month (according to JP Morgan’s global bond yield series); while outstanding negative yielding debt peaked at over $17tn in August (having been $10tn at the start of May).

With global equities largely flat Y-o-Y (i.e. S&P1200 +2%) a paradigm shift appears to have occurred: Market participants are buying bonds for capital appreciation and equities for their yield.

Fig 1: Longview dynamic ERP deviation model vs. S&P500*

In the valuation extract from our latest quarterly asset allocation publication we examine the effect of the recent market moves on a number of key assets. This includes:

• (1) comparing the yield of equities and bonds & why the stage is set for equity gains;
  
• (2) whether the UK’s Brexit discount is now compelling;
  
• (3) why Chinese valuations are particularly attractive (and point to a move higher in equities);
  
• (4) how US valuations are more attractive than European if you look beyond the headlines; and
  
• (5 & 6) a look at what’s cheap and what’s expensive – the extreme cases.

The full extract is available here.

*This model builds on a traditional equity risk premium (ERP) measure by incorporating relative volatility metrics, and has been reasonably efficacious in determining BUYing opportunities since its inception. The last time the indicator moved below -1 standard deviation was February 2016 (the S&P500 then rallied 22.3% in the following year), and before that August 2011 (which was followed by a 15.4% rally in the S&P500 over the following year).