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Is the Emerging Market Bubble About to Burst?

Posted Jul 27, 2009 02:14pm EDT by Peter Gorenstein in Investing
Related: eem, fxi, ewz, rsx, ^dji, ^GSPC

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."

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