To say that the world is currently rife with geopolitical turmoil and economic uncertainty would be an understatement. Such periods usually mean a rough ride for risky assets as investors shift their capital to safer havens until the storms subside. But these are not normal times. Emerging market securities are often the first to experience a pullback, yet the broad MSCI Emerging Markets Index has gained 8.5% YTD after having spent 2013 in the red.
There are myriad explanations for the rebound in emerging market (EM) indices this year. Some are due to bullish fundamentals in specific countries. Yet one cannot ignore that in a yield-starved environment, investors are clamoring for any security that portends to offer an attractive return. Such demand-driven rallies….we call them bubbles….have a tendency to disregard fundamentals, which obscures truly attractive destinations for one’s capital and enables pretenders to take a seat at the global financial markets table. Ironically, this overly-bullish, top-down approach (which has more-than-once been in favor during the past decade) is occurring at a time when heretofore major emerging economies are running into stiff economic headwinds, backsliding on market-friendly reforms, or in the case of Russia, putting geopolitical arrogance ahead of economic development. To continue reading please click here.