Friday, July 3, 2009

Emerging Market Bubble Re-Inflating?

Interesting story out from Bloomberg this morning. The emerging market trade is hotter than ever as money has been flooding into countries like China, India, etc.

  • Developing countries’ share of worldwide equity value climbed to a record as the fastest- growing economies lured investors amid the first global recession since World War II.
  • The 22 nations classified as “emerging” by index provider MSCI Inc. comprise 24 percent of world market capitalization, up from 18 percent at the start of this year, the highest proportion since Bloomberg began compiling the data in 2003. China shares surpassed $3 trillion yesterday for the first time since August, from $1.8 trillion at the end of 2008.
  • “Everyone is trying to jump on that bandwagon,” said Nicholas Field, who helps manage about $11 billion in emerging- market stocks at Schroders Plc in London. “There are projects in emerging markets in which I can make more money than I can in the West at the moment.”
I see some trouble here. Investors seem to be relying heavily on the Chinese Stimulus as a driver for new economic growth. Although it may be better focused than the U.S. version, its not necessarily going to be a silver bullet. Investors still fall into that trap that says, "The U.S. and Europe are weak, so I'll just put my money in emerging markets." It can be profitable to move a portion of assets there, but we shouldn't get carried away. Emerging markets like China still depend heavily on trade and if most of the U.S. is still in trouble, it will lag on emerging markets. Also, if the U.S. markets dip back in and re-test lows, its unlikely emerging markets will be unaffected.

The only emerging market-related equities I own is a Africa and Middle East fund (which is actually considered more frontier market than emerging market), and I own some shares of ABB, which has significant exposure to emerging markets, but by no means are a direct play.

I understand the allure of these markets, and with ETFs, its easier than ever to invest in them. I'm not saying stay away, but rather be aware that these markets can form bubbles just like any of the others we've seen (commodities, mortgages, emerging markets in 07-08).

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