James Mackintosh

Are emerging markets a bargain or yet another proverbial falling knife?

More bargain-hunters are starting to appear. Today Barclays equity strategists Dennis Jose, Ian Scott and Joao Toniato went so far as to recommend buying Russia’s Gazprom and Sberbank (along with China Shipping Development Co) to gain EM exposure.

Could emerging markets be the most-disliked region currently? They have been punished by investors, underperforming developed market equities by nearly 35% since Nov 2010, considerably worse than what would be suggested by their earnings (Figure 2). Amongst sellside analysts, a Bloomberg poll seems to indicate that few research houses recommend an
overweight on EM equities. From our meetings as well, we find most investors have little sympathy for our recent call to overweight EM equities

A few rather nice Barclays valuation charts after the break, plus some caution.


John Authers

How exactly should we benchmark hedge funds? It is obviously unfair to compare them directly to equity indices, as the whole point of hedge funds is to aim for an “absolute” return, not a return relative to gains in the equity market. They will naturally under-perform an S&P 500 tracker in years like 2013 when the stock market shoots straight up.

I drew attention last week to the way hedge fund returns have been left badly behind by long-only equity returns over the five years of the post-crisis relief rally, and this understandably provoked comments that this was an unfair comparison. There are also obviously many methodological problems with creating hedge fund indices. Hedge funds have many different strategies, and they may be particularly prone to “survivorship bias” – those that do not have a good story to tell tend to shut down quietly, and do not tell index compilers about their record.

However, hedge funds do have to accept that their offerings will be used by asset allocators trying to use them to balance against the main asset classes of equities and bonds. On that basis, the following chart, produced by Barclays’ capital solutions group using HFRI indices, is very interesting.

It confirms a basic intuition: hedge funds did very well during the bursting of the dotcom bubble, more than held their own during the subsequent 2002-2007 rally, and have had a far harder time of it in the last five years. Why might this be? 

James Mackintosh

There’s a lot of excitement now junk bond yields (at least on one index) have dropped below 5 per cent for the first time. What to call them, for one thing. “High yield” no longer seems appropriate, although frankly “junk” was always better, and remains just as good. The fact that they barely ever default any longer, suggesting on its face that they are no longer junk, is yet another problem – as John discusses with Deutsche Bank’s Jim Reid in today’s Note video.

But hold on a minute. It is true yields have plunged. But the following charts show that junk bonds are much shorter dated now than they were, so the drop in yield is not as dramatic as it looks (if you lend someone money for less time, you should expect a lower yield as the loan is less risky). The average duration on the index is at a record-low three and a half years (modified duration is a tad longer, but still a record low).

Junk bond yield and duration

On the other hand, investment-grade bonds (and top-grade junk too) have longer maturities – in the case of investment grade, the longest since 1980 at more than seven years. So the ultra-low yields (just over 2.5 per cent) of these better-quality bonds are even lower when adjusted for the risk of lending money for longer. Chart-fest after the jump.