Are emerging markets forming a new bubble ?

The Economist Intelligence Unit has reported that last month foreign direct investment flows into emerging markets exceeded, for the first time, those into developed markets.

Overall fund flows have slumped by half since their 2007 highs so developed economies are facing a significant drop. Is this yet another cue to steer clear of developed economies? Or else could this point to another bubble in emerging markets?

Asia has been the chief beneficiary of this change in the pattern of fund flows. This is no real surprise - international money looks for a home where it can generate decent returns and Asia has the strongest growth story of all the emerging markets. The IMF has just doubled its forecast for Asian growth, which is driven by improving exports. There seems to be a real possibility that some measure of decoupling is happening after all as Asian domestic demand emerges to fill the hole left by a weakened US.

Just as developed markets are struggling to shore up their property and investment markets, the governments of some Asian countries are worrying about bubbles. The Singapore property market, for example, has risen more than 15% since the start of the year and is seeing a flood of Russian money in search of a stable home. But this is not just confined to Asia - Nicholas Eyzaguirre, western hemisphere director of the IMF, recent warned in an interview with the FT that Latin America had weathered the crisis so well that appreciating currencies and inflows of foreign capital could generate bubbles in future.


This bounce-back has certainly been reflected in stock markets.The FTSE Xinhua is around 65% ahead over the year to date, compared with around 12% for the FTSE 100. The worry for investors now is that all the good news may be in the price of emerging markets. After all, does anyone really expect developed economies to outpace those of emerging markets? Pretty much everyone sees that emerging markets are currently the engine of world growth, which at the very least should be ringing some contrarian alarm bells.

That said, it is likely to be some time before this becomes a real issue. Plenty of fund managers talk about the amount of cash sitting on the sidelines. It has to go somewhere and it's unlikely to find its way into developed markets as a priority. Emerging markets have always been subject to huge waves of optimism and then widespread sell-offs. It's just a question of being aware of when things might have gone too far, so investors should remain alert

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