Stocks are edging out bonds as the choice of 2021 in emerging markets.
The world's biggest money managers, from BlackRock to J.P. Morgan and UBS, are betting the post-pandemic economic recovery will be so swift that it's no longer necessary to be content with the single-digit yields of developing-nation debt. Equities will offer much higher returns in 2021, they say, in a signal that a decade of underperformance may come to an end.
If fund flows are any indication, the rush into equities has already begun. A risk-on shift brought about by Joe Biden's U.S. election victory and coronavirus vaccine successes has helped exchange-traded funds buying stocks get five times the deposits that bond funds have received in the past six weeks.
"Every standard framework model you use in finance would mean that equities will do better than bonds in 2021," said Michael Bolliger, the Zurich-based head of emerging market asset allocation at UBS Group's wealth management division. "Rebalancing tactically makes sense at this point. Our base-case scenario is that the world returns to normalcy and we will see a catch-up in growth and in cyclical markets."
Bonds have been the most profitable asset class in emerging markets over the past decade, beating stocks in volatility-adjusted returns almost every year except 2017. For every $1 that investors gained from equities, they made $3 from local-currency notes and $7 from dollar denominated debt during the period. A structural slowdown in China's economy, a plethora of country-specific crises and commodity-price losses kept a lid on equity performance.
But all that's about to change, money managers say. While the earnings outlook for stocks is increasing at the fastest quarterly pace in 11 years, bond yields have sunk to record lows. At about 3.5%, the average yield on both local-currency and dollar bonds is a full 3 percentage points below equity yields. And in an environment where corporate profits are growing but governments are saddled with unprecedented debt burdens, investors may find it more rewarding to stick with stocks.