Emerging markets submerging again

Renewed optimism over the global economy has propelled the MSCI Emerging Market index to a four-week high, around 14% above its October low. But "this is not laying the path for a long rally", says Nicholas Field of Schroders. The latest surge of optimism was based on a pledge by G20 finance ministers to double the International Monetary Fund's rescue reserves. This is particularly good news for eastern Europe, but officials are still wrangling over "who will pay and how", says Forbes.com.

Elsewhere, optimism about China's prospects looks overdone. Annual retail sales growth slowed to 15% in the first two months of 2009; exports slid 26% year-on-year in February; and a slide in annual industrial production growth to below 4% also suggests that the government stimulus has yet to make a strong impact, says Terence Poon in The Wall Street Journal.

The global economy still looks bleak. Capital Economics is now pencilling in growth of just 2.5% for Asia ex-Japan in 2009, on a par with the trough of 2.4% seen during the Asian crisis. So "earnings downgrades are likely to accelerate", says George Hoguet of State Street Global Advisors. The 2009 p/e of nine, then, which is in any case higher than ratios seen in previous cycles, is likely to be deceptively low.

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Then there's the high correlation of emerging markets with developed markets, which means that the former remain vulnerable to further jitters on Wall Street, especially since the credit crisis is nowhere near solved. The danger, says Michael Hartnett of Merrill Lynch, is that "the death spiral" in US financials threatens to "take emerging markets back to old lows".