The MSCI Emerging Markets index has returned around 7% this year and has reached a near-three-year high. But the rally’s days look numbered, reckons Fidelity’s Tom Stevenson in The Sunday Telegraph.
For one thing, valuations no longer look compelling, especially when you consider that earnings have not kept pace with prices. Headwinds are gathering. Interest-rate hikes in the US are moving closer, implying that money will leave traditionally risky emerging markets and head back to the West as the yield on safer assets rises.
Meanwhile, it hardly helps that the star performers in this year’s rally, such as India and Indonesia, depend more than most on foreign money, as they have current-account deficits. Investors hope that reform-minded governments in both states will breath fresh life into the economies, but these expectations may be overdone.
Goldman Sachs points out that Taiwan, Mexico and Korea seem the safest emerging markets at present: they are the “most exposed to the US recovery and least exposed to currency flight”.