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“Heady returns in emerging market assets in the past three years have caught the attention of even the most risk-averse investors,” say Sabyasachi Mitra and Daniel Bases on Reuters.
The returns have been phenomenal: Russia’s benchmark RTS index has soared 130% since last May and the six Gulf markets were up an average 92% last year. The benchmark MSCI emerging markets index has risen about 160% since mid-2003 “and now accounts for 14% of the entire capitalisation of global stocks”, says Ambrose Evans-Pritchard in The Daily Telegraph.
But are these levels sustainable? No, says the Bank of International Settlements. Its quarterly report warns that “foreign investors have snapped up emerging market bonds and equities, pushing indicators of valuations towards – and in some cases beyond – the upper end of their historical range”. That is because “investors may have underpriced country risk, [so] emerging markets could be vulnerable to a repricing”. And as America, the eurozone and Japan raise interest rates, the supply of cheap money that has been fuelling emerging market booms could come to an end, says Evans-Pritchard.
Indeed, “I think country risks have been sacrificed in the search for yields”, Simon Derrick, head of currency research at the Bank of New York, told Reuters. Worryingly, the current situation bears an uncanny resemblance to the internet bubble in 1999 – and subsequent collapse of global stockmarkets – and awakens memories of the 1997/1998 emerging markets crisis.
Perhaps it’s not all that bad, says Malcolm Johnston of Johnston Campbell Ltd, a leading Irish financial planning firm, in The Belfast Telegraph. Emerging markets can cope with the higher valuations as “debts are being restructured and current-account surpluses increasing”. While an upturn in interest rates around the globe could hit liquidity, “keep in mind that 200 years ago, India and China made up 50% of world GDP”, says Carl Delfeld of Chartwell Partners, in Forbes. “We have a long way to go with this story, but you need a smart strategy to weather some turbulence now and then.”
Published in Stock-Markets
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Annunziata Rees-Mogg
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