The spectacular rally in emerging markets “looks like another bubble in the making” says Robert P. Smith, author of “Riches Among the Ruins, Adventures in the Dark Corners of the Global Economy”. Smith, a pioneering trader and investor in emerging markets, believes the rally that brought the MSCI EM Index up almost 70% since early March 2009, is based on an expectation of growth ocurring in emerging economies despite depressed consumer demand in developed countries, particularly in America. This assumption relies on the theory of “decoupling” that posits developing economies growing independently of those in the developed world. Proponents of decoupling point to the expected growth from China’s stimulus program, which together with an overhaul of the healthcare system, represent over 16% of China’s 2008 GDP. Smith is sceptical that so much money can be quickly spent in an efficient manner, “much of the stimulus may be going to politically connected loss-making enterprises and thus will result in no lasting growth. We may discover in a few months that the rich valuations at which we now buy EM shares are unsupported by the risk adjusted prospects for earnings and experience sharp losses.”
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