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Will emerging markets retreat?

May 27, 2009

Is this the next big bubble?
Barely few months into the emerging markets rally and caution is already being sounded about how this could turn out to be the next big bubble. Of course, when assets go up by as much as 50% in a short time as the stock markets in emerging markets including India have done, one has every reason to feel worried. However, this is not stopping a large number of money managers to up their stakes in equities especially emerging markets. As per CNN Money, a total of as many as 400 money managers, controlling portfolios worth a whopping US$ 1 trillion believe that the global economy will improve over the next twelve months and hence, 46% of them have become overweight on emerging market equities. Just to put things in perspective, the count stood at 26% in the month of April. However, before one tries to follow in their footsteps, it would help to bring back into focus the bubble theory. It so emerges that money managers do not really have a stellar track record when it comes to investing in emerging markets. While the MSCI emerging markets ETF has given nearly 12% compounded returns over the past five years, the dollar weighted investor returns stood at a measly 1% during the same period. The severe underperformance was attributed mainly to poor timing. Hence, the odds that the timing may be wrong this time around as well are pretty high indeed. Does this mean that a correction in emerging markets is round the corner? Well, only time will tell. But given the way stocks of companies across the board, without consideration of quality, have surged since March, caution needs to be the buzzword.

PSU banks may cut interest rates
As far as India is concerned, the correction does look like a remote possibility or even if it happens, it may not be of a very big magnitude. We say so because the real economic scenario may just get a bit better. And the reason behind our optimism is a story in a leading daily which says that a clutch of government owned banks may soon lower their interest rates by 1-1.5% after a directive from the finance ministry. It should be noted that Punjab National Bank is likely to be the benchmark in this case as it already has the lowest lending rates in the country and hence may be the only PSU bank that may not lower the rates. All the other banks however may have to toe the line. Finance ministry on its part has maintained that it is not putting any unreasonable pressure on the banks and has been only asking them to do so if they have enough headroom.

The US economy has something to cheer too
Most Asian indices are trading strong currently. The buoyancy though has nothing to do with local factors. They are up in response to a better than expected jump in consumer confidence in the world's largest economy. As per reports that poured in, US consumer confidence stood at its highest level in the month of May and also posted the biggest one month jump since April 2003.

The reading comes as a big relief as the US consumer is not only the engine of the US economy but also plays a key role in determining the fortunes of the export led economies of quite a few Asian nations. However, this does not mean that the contraction in the US economy has come to an end. At best, it may indicate that the magnitude of decline has come down a bit.

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