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Bank analysts say higher yields make emerging markets stocks attractive post-Brexit

Themarket wobbles since the Brexit vote offered a buy signal for emerging markets(EM) stocks, some analysts said.

And thefinger was being pointed squarely at the negative yields on developed marketsbonds.

Followingthe turmoil of the U.K.'s vote to exit the European Union (EU), the combinedvalue of bonds with negative yields jumped to $11.7 trillion, according to a Fitch Ratings report on June 29, marking a 12.5percent increase since the end of May.

As theBrexit turmoil sent investors fleeing to safe-haven sovereign debt, Japanesebonds maturing in 40 years yielded less than 0.10 percent, while investors paidfor the privilege of lending short-term money to Spain and Italy, countrieswhere fiscal profligacy had sparked a crisis only a few years ago.

Thatmade emergingmarkets equities look good by comparison, analysts said.

"Whileyields in emerging markets have also come down, they remain considerably higherthan anything available in developed markets, and in quite a few cases arerather convincing from a risk-reward perspective," Taimur Baig, chiefeconomist at Deutsche Bank, wrote in a report titled, "Brexit's loss couldbe EM's gain," on July 1.

"Economieslike Brazil, India, Indonesia, and Turkey have their economic, structural, andpolitical issues, but their relative attractiveness is considerable in thisnegative yield environment," he said.

"Theseeconomies will, in all likelihood, deliver higher nominal gross domesticproduct (GDP) growth rates than their developed market counterparts, whichshould manifest in higher revenue and profit growth, making a strong case fortheir equity markets."

Thatview was echoed by JPMorgan.

"Inan emerging market context, you've had commodity stocks absolutely hammered,energy stocks absolutely hammered, exporters absolutely hammered. You haveexpectations that are very low and market positioning that is very underweightemerging market equities to begin with," James Sullivan, head ofAsia-Pacific equities research at JPMorgan, told reporters on June 29."Then you add into that the overall macro perspective from a rateperspective."

He notedthat there were 11 emerging markets where JPMorgan expected significant ratecuts, compared with many developed markets where central banks effectively wereno longer able to use interest rates as tools.

That'swhy Sullivan was positive on yield-oriented emerging market stocks such astelecommunications, utilities and real-estate investment trusts (REITs).

"Ifyou're in a low growth environment and people are cutting rates, then yieldoutperforms," he said.

Otherswere also putting in their two-bits in favor of emerging markets.

MarkJolley, equity strategist at CCB International Securities, told CNBC's"Squawk Box" on Monday that negative interest rate policies in Japanand Europe were set to continue driving fund flows into emering markets andperipheral developed markets such as Australia.

"Australiadoesn't look that great at the moment, emerging markets don't look that great,but relative to these places which are offering negative yield, they look quitegood so I think you'll continue to see people buying that market foryield," Jolley said.

Nomurawas also more positive on emerging markets in the wake of the Brexit vote,upgrading Southeast Asian markets as a result.

"Ina post-Brexit environment where we expect greater policy accommodation (fromthe Bank of England, the Federal Reserve, the Bank of Japan, the EuropeanCentral Bank and local central banks), ASEAN (Association of Southeast AsianNations) should thus continue to outperform," the bank's analysts said ina note on July 1.

"Weexpect a period of inflows on the back of lower return expectations in Europeand Japan. Within Asia, Asean countries have among the lowest trade linkagesand stocks markets' revenue exposure to Europe," it added.

Nomuraraised its recommendation on Malaysia to overweight and recommended Indonesiaas its "top overweight" in the region.

To besure, the pivot toward emerging markets wasn't absolute. Deutsche Bank's Baig,for one, said he was cautious on emerging Europe because the region was likelyto be affected by Brexit fallout due to strong trade and financial ties to theEuropean Union.

AndGoldman Sachs didn't appear to be fully convinced, cutting its target for theMSCI Asia Pacific ex-Japan index in a note dated July 1. Goldman set its indextargets at 395, 400 and 430 on a three-, six- and 12-month basis, down from420, 420 and 425 previously.

WhileGoldman estimated that Asia's economic growth would only take a hit of about 10basis point from the Brexit, it noted that "second-order" impacts,such as greater uncertainty weighing domestic spending, could further shavegrowth in the region.

That waslikely to weigh on markets in Asia, the bank added.

"Regionalequity markets have historically been closely correlated with those inEurope," it said, estimating the downside risk from a contraction in riskappetite could be 5-10 percent reduction in value for Asia's stock markets.