Beware Riptide in Emerging Markets

04/06/2009 12:00 am EST

Focus: GLOBAL

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of the Chartwell Global ETF Report, warns that latecomers to the emerging-market party could get hurt.

Emerging markets have made a nice rally recently, and you can see this reflected in some [exchange traded funds]. Singapore (NYSEArca: EWS) is up 17.5% over the past month, Hong Kong (NYSEArca: EWH) up 9.6%, Templeton Emerging Markets Debt (NYSEArca: TEI) up 11.9% and Wisdom Tree Small Cap Emerging Markets (NYSEArca: DGS) up 16%. Go figure.

Funds dedicated to emerging market equities reported their largest weekly inflows since May 2008 during the week ended March 25th, Merrill Lynch said. These funds attracted $2.3 billion in a third consecutive week of inflows, including $1.6 billion through ETFs.

According to EPFR Global, during the past three weeks, emerging market funds have had a net positive $3 billion inflow while the US had a $9 billion net outflow. Brazil and China together netted $1 billion, while Eastern Europe, India, South Korea, and Mexico were negative.

But I would be careful about jumping onto the bandwagon right now. In January 1998, when Asian markets had halved from their July 1997 peak, flows into regional funds also turned positive, points out Citigroup. Investors who got in then lost about a third of their money before markets finally bottomed in early September. Other indicators, such as price/book value, are scarcely more tempting now. So far, real estate is the only sector marked down to the lows reached during the last recession.

China is now the darling of those focused on emerging markets, but steel prices continue to fall, foreign direct investment contracted sharply, coal sales tumbled, power demand was weaker, and fixed investment in property recently hit a multi-decade low. The H-shares of Chinese companies that trade in Hong Kong are down 6% this year.

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