Has a new emerging markets bubble been inflated?
This answer affects both investors, who saw stock prices tumble on Wednesday, and policymakers, who are due to announce monetary and fiscal policies over the next month.
The International Monetary Fund (IMF) has shot down the idea of a new asset bubble, in an update to its semi-annual Global Financial Stability Report. It has said that “the rise in asset prices cannot yet be considered excessive and widespread”.
Indian valuations, too, seem stretched, compared with the average price-earnings multiples the local stock market has supported over the past 15 years, but overvaluation is not as evident as it was in late 1999 and mid-2007.
IMF has also said the initial surge in portfolio inflows into emerging markets in mid-2009 was the result of push factors as risk appetite returned. But the subsequent inflows came from pull factors such as company earnings and economic growth. That means money will pour in this year only if the economic recovery stays on track.