Show me the money

Although it remains the dog days of summer, yesterday was fairly interesting in its own way.   Not only did global equities have the temerity to go down, but the dollar also traded on the back foot for reasons that were not immediately obvious.  Throw in some comments from Dudley that look likely to be the first half of the Fed's next bait 'n' switch, and you had end-2017 Fed funds pricing at nearly its most extreme level since the Brexit vote.

It occurred to your author that he hadn't run his global equity scorecard in quite some time.  Given the shifts in relative market fundamentals and pricing over the last couple of quarters, an update seemed well overdue.   Thus, with a little help from friend-of-the-blog "Raving Irons", he refreshed the scorecard, the results of which can be seen below.  First, the developed market scorecard:

Well, well, isn't that interesting.   Just shy of two months after the Brexit vote, and UK equities top the table by a comfortable margin.  The US is middle of the pack, and two of the biggest losers in the demographic sweepstakes, Italy and Japan, bring up the rear.   The divergent opinion on UK and Japanese stocks is particularly interesting given the move in GBP/JPY this year.

Meanwhile, in EM space, Brazil has clearly escaped the cellar that it occupied for so much of last year:

Taiwan seems to be a perennial favourite of the scorecard; a perennial favourite of market narrative, India, is close to the bottom, meanwhile.

Macro Man thought it would be useful to examine one of the factors that goes into the scorecard, namely dividend yields.   One often hears that the primary attraction of owning the SPX and other equity markets these days is the yield on offer, which is greater than that of 10 year government bonds.  The table below displays equity market dividend yields in two ways: the raw dividend yield, and the difference between that yield and the local 5y swap rate.

The table is pretty interesting.   Curiously, the US stands out for having the lowest DM dividend yield, and the lowest in comparison to 5y swap rates.   Yet its market is one of the best performers this year, with the yield cited as a primary explanatory variable!  Of course, there are pitfalls from taking yields at face value, as the cases of Spain and Italy in particular illustrate.   It's a fine line between "value" and "value trap", particularly when the source of much of the yield on offer (the banking sector) is in such worrisome shape.  Much of the 4% yield on offer in the UK, meanwhile, comes from cash cow companies.  That the DAX hasn't done better this year given the carry premium to negative yield bonds says quite a bit about the state of asset allocation in the Eurozone these days.

The table of EM yields looks rather different:

Did you ever think you'd see the day when Turkish yields were lower than those in Germany, or Indonesian lower than Japanese?  Obviously, this refers to dividends rather than fixed income securities, but still....   The paucity of yield on offer in comparison to both DM yields and local currency fixed income markets goes quite a way, in Macro Man's view, to explaining the underperformance of EM vs developed markets in recent years.   Yes, EM has fared better recently, but that may well be short covering as much as anything.

In a world where Rod Tidwell is a successful asset allocator, it's hard to see EM performing well on a sustained basis unless they show him the money.