Emerging markets: an exhilarating, but potentially lethal, ride | FT Alphaville

Emerging markets: an exhilarating, but potentially lethal, ride

Out of one bubble and right into the next. John Authers earlier this week pondered whether the stampede towards emerging markets following the Fed’s gift to stock markets was just creating another thing to go pop down the line.

Now Jonathan Garner at Morgan Stanley, which has been leading the charge on economic decoupling of emerging markets from the US, has gone a bit cold as well. Holding a tiger — let alone a dragon — by the tail is a recipe for an exhilarating ride, but potentially lethal should it turn and bite, he notes in a report which advises investors to take some profits at this stage.

179.jpgThis is what happens when everyone suddenly agrees with you – the bulls are suddenly feeling nervous now they seem to be occupying consensus ground. The MSCI Emerging Markets index is up 23 per cent since Garner advised investors to pile in back in August, hitting a new all-time high earlier this week. Garner notes:

The gains have been so great in such a short period of time that the MSCI EM is now again trading unusually far (19%) above its 200 day moving average.

Valuation is also an area of concern, he adds. Trailing pe ratios have risen to 18.5 times, about 12 per cent above the 15 year average and 10 per cent ahead of where valuations are globally.

Finally, Garner cites a reason for caution that he argues seems to be under-appreciated by investors – Chinese valuations.

The country accounts for almost 16 per cent of the MSCI EM index – and a share sell off, say Morgan Stanley, in A or H share indices, would raise “substantial question marks over China’s growth momentum.” The bull market in China has deep underpinnings, they argue, but since the analysts warned that it was dangerous to turn bearish on China too soon back in April, the A-share index has risen by 66 per cent. The market is now challenging highs seen at the top of the 1999/2000 bull run with PEs in the high 50s. Both the Hong Kong and mainland China markets are on the point of moving into uncharted territory versus their own history, says Garner.

Handle with care then. As the analysts would have it, not all bubbles end in recessions (but most do.)