Emerging markets have been a prominent beneficiary of all the global stimulus packages and Central Bank money printing and bailouts.
As most of you already know, I have not been very active in the equity markets recently.
Looking back, maybe I should have done a lot more buying in March! My current strategy is to continue to sell into the rally here in the Indian Markets. Aaaah the benefit of hindsight!
Stock specific opportunities may come along, but risks outweigh rewards at this stage of the game.
Going back to the MSCI Emerging Markets Index chart above, its quite clear that markets have had a fantastic run.
In the year 2007, when bubbles were everywhere, the above index scaled to just over 1250!
After the horrors of the last two years, investors seem to be getting urealistically optimistic and greedy at just the wrong time.
Here's a snapshot of whats going on:
- Soaring government debt is replacing sinking private sector debt.
- Real incomes continue to shrink, and debt levels are unsustainably high.
- Falling home prices and underwater mortgages are adding to the toxic waste in the books of Freddie Mac and Fannie Mae.
- Mark to market accounting has a whole new meaning these days!
- Investment Banks are all set for a round of mega bonuses, even as their shareholders, the government and regulators stand by in silence. Bailouts to Bonuses!
- Oil prices are near $80, despite an usually high inventory level. ( maybe the sliding USD has helped the upward surge in oil prices )
- Unemployment is rising, and further cost cutting by companies may result in further layoffs. Underemployment and youth unemployment are topics almost never covered by the media these days.
- Emerging market exporters are struggling to hedge their forex risks in a volatile currency market. Meanwhile, their customers in the developed world are stuggling to pay down debt and for the first time in years are looking to cut back on expensive purchases this Christmas.
- Commodity driven emerging markets like Brazil and Russia remain vulnerable to a collapse in the prices of industrial commodities if the ''recession worsens''
To sum it up, the risk reward ratio is not in your favour at this stage. A low base effect may help boost year on year results for the quarters of December 2009 and March 2010, but the rally is getting rather long in the tooth
Invest, trade and speculate at your own risk.