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Is the Emerging Market Bubble About to Burst?

Posted Jul 27, 2009 02:14pm EDT by Peter Gorenstein in Investing

Attracted by rich returns this year, The Wall Street Journal reports investors are once again throwing piles of cash into emerging market funds.  $35.5 billion flowed into these stock funds in the first half of the year according to EPFR Global.  That's the most since the company started tracking the data in 1995.

That kind of overwhelmingly bullish behavior has some fearing a bubble. "I would be very, very wary of investing in emerging markets right now," says William Gamble president of the consulting firm Emerging Market Strategies.   Gamble's especially concerned about investing in emerging markets like China and Russia where access to information can be tricky.   "You get incomplete or inaccurate or just basically false information and so as a result these markets tend to move in very volatile ways," he says.

Volatile indeed.

So far the MCSI Barra Emerging Markets Index is up about 45% this year. But if history is any guide, this could all end badly.  Societe Generale's research shows price-to-book value of emerging market stocks is now richer than those in the developed world.  This has happened only once before - during a stretch in 2006-2007. Then, the bottom fell out and emerging market stocks plummeted 67% over the next 12 months.

Gamble thinks this can happen again. "These markets right now are pretty risky because I don't think that the markets reflect the underlying economic reality."

48 Comments

- Monday July 27, 2009 02:21PM EDT

Buy high sell low! Go fear and greed!

- Monday July 27, 2009 02:31PM EDT

This report scares me like no other before. I must move my 401k funds outta the EM's quickly to avoid loss.

- Monday July 27, 2009 02:34PM EDT

front run every thing .. make monie coming and going isn't life grand .. woof..

Yahoo! Finance User
Yahoo! Finance User - Monday July 27, 2009 02:41PM EDT

Oh ya- the inforamtion from American companies is so truthful and honest - give me a %^$^# break....

- Monday July 27, 2009 02:41PM EDT

It is clear that there is risk. We have all the protection in the world. SPIC FDIC SEC. He is giving good advice but I see money being made. Maybe we should worry just a little.

- Monday July 27, 2009 02:43PM EDT

Is that a sleeping beaver on his head? Hang everyone at Goldman Sachs.

- Monday July 27, 2009 02:44PM EDT

And what is the difference between Emerging Markets and US Markets? Remember AIG, Enron, MCI, and many other supposedly disclosed US corporations that hide information?

Yahoo! Finance User
Yahoo! Finance User - Monday July 27, 2009 02:48PM EDT

Bubbles? What Bubbles? Totalitarian states would never fudge their numbers! If you don't trust them that means you're not liberal enough for the N.W.O.

- Monday July 27, 2009 02:51PM EDT

Yeah, like U.S. corporations are so open with disclosure and with Wall street you are sure to get paid. Yeah, right, good luck with that. It is all a risk, and people know what they getting into. The bailouts were just wrong and we will be paying for it for a long time.

- Monday July 27, 2009 03:00PM EDT

False earnings made from drastic cuts to make a balance sheet look better ... how is this a recovery? When you cut jobs in order to balance your budget and your profits still drop ... that is a major concern as a business operator ... do people really buy that this is a recovery? are people really creating a new bubble by believing reports by stock brokerages that need your money to pay their CEOs?

- Monday July 27, 2009 03:04PM EDT

Quick give me your money so I can invest it into an emerging market you know nothing about and lure you with 35% gains just before you get 200% losses ... only brokers make money in this scheme ...

- Monday July 27, 2009 03:06PM EDT

Investing is a risk! PERIOD! Use common sense and logic and don't rely on feelings! If we all invested in things these so-called analyists want us to, we'll all end up like the frightened girl running in the dark, down a hill, through a revine, and through a forrest from the monster in a horror movie! (Oops! I just fell down and sprained my ankle; don't kill me!)

- Monday July 27, 2009 03:11PM EDT

HEY CONGRESS, PASS A LAW THAT EXEMPTS LOCAL PROPERTY TAX ON THOSE WHO LOSE THEIR JOBS. IT WILL CURTAIL THE LOCAL COERCION, AND PREVENT FORECLOSURES.

- Monday July 27, 2009 03:12PM EDT

Me thinks my butt cracked! Just think of all the people Obama could put to work fixing all those cracked U.S. citizen butts! O.K.! Even the illegals have to count too! Oh oh! That's not "politically correct"! Me bad! Soooo sorry! "Oops! I did it again"=sorry Brittany!

Yahoo! Finance User
Yahoo! Finance User - Monday July 27, 2009 03:12PM EDT

All the hype, my goodness. The economy was in such a deep hole that it will takes years to dig out. The unemployment is still too high, banks are failing, profits in large corporations are down but the stock market it up? Americans invest in the stock market which helps make these companies strong as well as our economy, and it would be really special if WS could at least have the decency to be honest.

- Monday July 27, 2009 03:22PM EDT

The bubbles in my stockbox have all strong hardcores - What I think will be my best bets is PLX. It has to do with1)) a foul up in the labs of GENZ who was making a unique medication for this rare disease and 2) an Israeli bio pharma which use carrots (!)in a bandnew safer drug for this ailment. FDA has invited them to make it available to sufferers as a shortage of the GENZ drug is threatening sufferers of this disease. PLX shares have done well on the news. ($ 5.50 now )but the potential is grand.Do dd! Louis d

- Monday July 27, 2009 03:23PM EDT

buddy.wilson@rocketmail.com - Monday July 27, 2009 02:37PM EDT Something has to give drove out to look for a new car today adn three dealerships were closed, that is a lot of commercial real Estate no one will be making payments on for long!.................................What does this comment have to do with emerging markets?

- Monday July 27, 2009 03:29PM EDT

I agree that there is a good possibility of an emerging market bubble. I haven't bought any emerging market mutual funds this year, but many of my past purchases are up 50 to 70% YTD - that's crazy! I've been selling them off lately becuase that seems too good to be stable and may crash soon. But then again, I could be wrong and miss out on more gains. I think I'll take my profit instead of risk losing it.

- Monday July 27, 2009 03:48PM EDT

Since the "sideline" cash in the US is not flowing into US markets then everything must be done to repatriate whatever cash that can be so the SLP can get a boost! Save Wall Street! Give them your money! After all, they'll tell you that you will get 8% per year over any 20 year period. Ya right. Trust Wall Street is an oxymoron.

- Monday July 27, 2009 03:50PM EDT

Until I can find a job like so many others that are looking out there, I hope things don't get better. I'm sure some of you can agree.

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