S&P Equity Research: Emerging-Market Equities Remain in Favor

NEW YORK, Sept. 29 /PRNewswire/ -- The stocks trading in some of the fast-growing emerging markets (EMs) of the world remain among international favorites for Alec Young, International Equity Strategist at S&P Equity Research Services (ERS), due to positive demographic trends, lower consumer, corporate and government debt, and valuations. Young discussed his international investment outlook during ERS' third-quarter 2010 webinar entitled "Are We Headed for a Bear Market?"

"We think EM's relatively low 13% share of free-float adjusted global equity-market capitalization is likely to grow briskly as it remains well below their much larger shares of gross domestic product (GDP), population, natural resources, and global currency reserves," Young says.

Young does not expect to see a bear market for overseas stocks and thinks returns for United States investors in certain international markets may benefit from ongoing weakness in the greenback. In particular, he thinks EM currencies are likely to continue appreciating vs. the United States dollar, further enhancing the dollar-denominated EM equity returns earned by United States investors.

With regard to valuations, which Young categorizes as lower than their developed peers, EM equities have the potential for higher valuations as risks likely recede gradually over time, he believes. For instance, Young thinks that in 20 years, Brazil, Russia, India, and China, known as the BRIC nations, will not be emerging markets "but rather developed markets afforded the same valuation premium currently associated with any of today's first world markets." The risks to investing in EM equities, he says, are lower transparency and liquidity.

For income-focused investors, Young also sees overseas equity-yield opportunities in developed markets. He believes risk-tolerant United States income-oriented investors should take advantage of the summer's global equity volatility to incorporate attractively valued, high-quality developed European and Asian equities into their broader yield-generation strategies.

"Equity dividend yields are more competitive than ever, especially overseas, where buybacks soak up less corporate cash," he says.

Income-oriented investors are faced with bond yields flirting with record lows throughout the developed world and what Young sees as little room for long-term upside. He not only sees better long-term value in stocks versus bonds, he also thinks equity dividends are likely to keep pace with inflation over time, in contrast to government-bond payouts whose recent paltry coupons are fixed.

As Young points out, as a result of trailing bonds for so long, the spread between the earnings yields of worldwide developed stock markets and their respective 10-year government bond yields are currently as wide as they have ever been.

"While bonds may enjoy near-term momentum, we believe risk-tolerant yield-oriented investors need to focus more on long-term value as their income needs will likely persist over time. If interest rates start to rise, the resulting decline in bond prices would quickly negate today's low payouts, in our view," Young notes.

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