A Quechua shepherd lost while returning from taking his flock of sheep to the mountains of Bolivia, 500 years ago, stumbled upon some veins of silver. It did not take long for Spanish settlers to begin exploiting what would become one of the richest mines in the world and from which the expression “worth a potosí” originated, referring to something or someone of great value.
Although this mine was discovered by chance, its exploitation was difficult, especially for the indigenous population, subject to the “mita”, which entailed days of more than 15 hours of work between excavations and extraction of metals. Mining is known today as one of the most tiring tasks, but it was necessary to obtain materials that are now indispensable. Not only silver and gold, but also coal, copper, nickel and even salt.
In any case, it is an example that the reward to be obtained is worth the work to be done, which is not always the case. This concept, introduced to the market, is that of profitability/risk, which indicates at each moment the relationship between the expected return on an investment and the risk assumed with it. Compared to stocks, the risk premium is the difference in expected profitability of a stock asset and a fixed income, with lower risk. When this difference is greater, the investor will be more tempted to buy shares, while the incentive to do so is reduced when the profitability of purchasing sovereign bonds on the secondary is close to that which can be won with a riskier asset such as the bag.
In recent months there has been a rally both the stock market and debt. Concretely, with the S&P 500 or the Nasdaq 100 more than 20% are gained in 2024 while In Europe, yields are around 10% that the EuroStoxx 50 has revalued. The Ibex, the most bullish on the Old Continent, gains nearly 19% in 2024 while, conversely, the French stock market is lagging behind and is barely appreciating by half a percentage point.
“On the stock market, there are indices which have evolved a lot and others, notably those of little And medium capwhich opened a differential with the big ones that had never existed before, so I would not recommend leaving these indices to buy the big ones, even if you would have to go on a case by case basis”, explains Rafael Valera, CEO and manager bond. purchase and hold.
In the bond sector, despite these recent increases, the balance sheet for the year is much flatter since the first half of the year is reflected in the delay in the start of rate cuts, leading to losses for this type of assets. SO, of global debt, you will only get 1.5% in 2024according to Bloomberg Barclays indices. By isolating only what is happening in sovereign bonds, considered the safest type of fixed income, In the United States, profitability is 2.25% in the year while in Europe, it amounts to 2.65%according to these same indices. However, if we stick to the main references, with the T-note this price loses another 0.4% while he pack shows losses of 0.1%. “Fixed income has also come a very long way in the last couple of years, but it is true that, depending on your inflation expectations, there may still be a way to go,” adds Valera.
Thus, the expected returns on these assets have changed since the start of the year. On the stock market, if we calculate it through the profit multiplier, the expected profitability for next year is 4% of the Nasdaq 100 (which trades at a PER greater than 25 times) at 10% of the Italian Ftse Mib. On the Ibex, for its part, a rebound of almost 9% could be anticipated by paying a PER (times the profit included in the share price) of 11.2 times for 2025 profits. This expectation emerges from the calculation of the inverse of the PER. Thus, someone who invests 100 euros today in something that is listed at PER 10 would take 10 years to recover their money and from there we can deduce that this asset offers an annual return of 10% (compound interest does not are not taken into account). account).
These returns contrast with those that can be expected from less risky assets, such as sovereign bonds. In this case, the yields now demanded on the secondary market for 10-year maturities vary from 2.2% in Germany to 4.1% in the United Kingdom in Europe. On the other side of the Atlantic, the American 10-year also now offers a yield of 4.1% after having touched 3.6% barely a month ago.
Thus, the risk premium of stock markets, understood as this additional profitability sought in relation to the insurance of assets with public debt, varies considerably depending on the stock exchange in question since it is listed at very different profit multipliers between actions. . themselves and the prices of the sovereign bonds of each State.
Thus, in the United States, the recent decline in bonds made the difference less than one percentage point between what is expected of the S&P 500 for next year and the T-note. What’s more, whoever buys the Nasdaq 100 could even obtain a lower return than what the sovereign promises.
On this side of the Atlantic, the differences are a little greater, which makes the risk-taking inherent in the stock market a little more attractive. On average, European sovereign bonds fall a little over 3% per year, or 4 points less than what emerges from the inverse of the PER of the Stoxx 600. Below 5 would also be the French and British stock markets. The latter, above all, penalized by a Golden which must have an annual profitability above 4%, one percentage point more than the Spanish and French benchmarks, which converged after the elections in the French country. Furthermore, its benchmark index, the Cac 40, will only offer a revaluation of 7.5% in 2025 despite the fact that this year was left behind and it did not obtain any increase because it is the market most penalized by the political situation and where analysts have reduced their profit estimates the most.
On the contrary, in Italy, Spain and Germany the difference in expected profitability of their stock markets compared to their 10-year bonds exceeds 5%transforming them into the most attractive in this sense. And this, despite the fact that these three parks are among the most bullish in 2024, with revaluations of between 14 and 18% (see graph).
“We believe that with the currently expected returns it is better to gain exposure to lower volatilities that also offer attractive returns and that is why in our flexible fund we now have 45% in the stock market and the rest in debt,” Valera explains. “Going up a highway is not the same as following a Roman road,” he jokes. “In fixed income portfolios you will make money and you will be able to clearly beat inflation with little volatility. In fixed income, the certainty is vastly greater than in variable income because, Unless something strange happens, interest rates will fall and there is still plenty of liquidity in the market. Conservative investors no longer want as many deposits and bills and are turning to this type. of fixed income funds”, concludes the expert.
At AXA IM, Chris Iggo explains that “if the investor is worried about a recession in the United States or an escalation of the conflict in the Middle East, bonds seem interesting.” “The quarter just ended was incredibly good for fixed income, with spot rates falling and bond yields still with some room to fall as the easing cycle continues,” adds Iggo.
On this subject, Bank of America expects “greater pressure on stock market risk premia as economic growth cools and hopes for a rebound in productivity thanks to a decline in artificial intelligence in the short term” . “The stock market risk premium generally declines in times of global economic growth and vice versa, so if a slowdown is now expected, these premiums will increase [más compras de bonos que de bolsa]”, they add.
For Iggo, “the total return on global fixed income could be around 3% this year and it seems reasonable that similar or slightly higher levels will be achieved by 2025, with larger gains in credit markets “. “The macroeconomic context is favorable for fixed income securities, even if there are risks linked to recovery policies in the event of Donald Trump winning the elections,” he continues. “Current earnings forecasts for stocks are strong and we expect growth of 14% for the S&P 500 and 25% for the Nasdaq universe,” he concludes.
That’s the key. Current multipliers will vary as analysts revise their estimates and, in this case, Wall Street still attracts the strongest growth of profit, so current multipliers could decline or hold even in the face of larger stock market increases.
Not counting dividends
These exposed risk premiums do not take into account two factors. On the fixed income side, the investor will not only get the coupon he buys, but will also be able to achieve additional profitability depending on the change in the price of the bond itself, which will be supported by declines rates anticipated by the market.
On the equity side, profitability expectations do not include dividends to be received. And, in this case, it is clearly much more favorable to European stock exchanges, where the rewards for shareholders are much more generous. So, for 2025, analysts calculate a dividend yield of just over one 1.4% for the S&P 500 and 3.5% for the Stoxx 600. The most notable in this context are the Ibex 35, with an additional 4.8% and especially the Italian Ftse Eb, with a 5.6%.
