Globetrotting with Macrobond’s Change Region function
This chart pack focuses on our Change Region functionality, which lets Macrobond users seamlessly apply a visualisation to different countries with the click of a button.
We’ve chosen two themes – the equity risk premium and the business cycle – and applied them to three different nations.
The stories revealed: Stateside, it appears to be the worst time in 20 years to invest in stocks as opposed to bonds – but the reverse is true in Brazil and China.?
Turning to our business cycle “clocks,” we show how much more pessimistic sentiment is in Germany than in Spain or Italy.
Equity risk premiums: US stocks seem unrewarding versus bonds
Stocks are supposed to be riskier than bonds in exchange for higher returns over time. However, in the US, that risk comes with less reward these days. With interest rates holding near the highest in almost two decades, portfolio allocation between bonds and stocks is more important than ever.
This chart creates a simplified “equity risk premium” for US stocks: it subtracts the 10-year Treasury yield from the equity earnings yield. A negative reading (last experienced in 2002) means bonds in fact returned more than stocks.
We aren’t back there yet, but we are close. Last year, the risk premium dropped through its 2007 low, and we are barely above zero.
Today, equity valuations remain high, and bond yields have risen significantly, limiting the excess returns investors can generate from stocks.
Equity risk premiums: China – an attractive entry point?
The picture is quite different in China. The equity risk premium has surpassed 5 percent. Soon, it might be more than two standard deviations away from the average.
(Our charts use color-coding to denote standard-deviation ranges from the norm.)
As China loosens monetary policy while stock prices remain in the doldrums, the unpopular equities market appears to be at its most attractive entry point since 2008.
Speaking of 2008 (and 2007), note how the equity rate premium swings outside the two-standard-deviation range in both directions during and after the global financial crisis – showing the effect that a crash, crisis-fighting rate cuts and the first stages of recovery can have on this measure.
Equity risk premiums: Brazil – a different world
Like China, Brazil also appears to offer an attractive entry point for stocks. The equity risk premium has wavered near a multi-decade high since 2019.
What’s notable is how different the average ERP is for Brazil over the past 22 years: negative 2 percent, versus positive 3 percent in the US. Bonds are historically more attractive than stocks given the risks.
As inflation has historically been much higher in Brazil, so have 10-year government bond yields. But in recent years, equity earnings yields have improved markedly.
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