Could emerging markets be heading for a collapse?

Emerging markets are back to where they were in September, before the collapse of Lehmann Brothers. But investors should beware, there could be trouble ahead.

Developing markets reached a milestone this week. The MSCI Emerging Markets index regained the level reached on 12 September, when the bankruptcy of Lehman Brothers sent equities into a tailspin. Following a 50% drop, the index has almost doubled since October. India and Brazil have gained a respective 64% and 89% this year, while global investors poured a record $35.5bn into emerging market stock funds in the first half.

Developing countries have "emerged from the crisis with their underlying superior secular growth trend solidified in investors' minds", says Ian Scott of Nomura. Emerging market demographics and debt levels compare favourably with the West, giving them greater long-term growth potential, and their banking systems have largely avoided trouble. Lending growth has resumed in Asia and Latin America, and "this is helping drive growth", says Morgan Stanley's Michael Wang.

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