New Delhi: The optimistic lot in the emerging markets has a reason to cheer. A research note by Macquarie argues that the current shift of funds from emerging markets to the developed peers might not continue for long.
Why? Valuation gaps are expected to narrow sharply in the coming months.
Macquarie analysts led by David Rickards note:
We suspect the current portfolio flows to the US are more tactical than strategic as the valuation differentials between the two regions are very narrow and insufficient to drive investor preference for more than the short term. That said, the recent economic data from the US suggests that US economic growth is accelerating which is likely to lead to upgrades to the 2011 EPS growth forecasts, which would encourage further funds flows at least for the next 3–6 months.
But wait! The underlying assumption and this is a big big assumption is that emerging markets will work faster towards removing infrastructure bottlenecks and douse the inflationary pressures in coming months.
(Does anyone see that happening in India?)
The report adds:
Yes, emerging markets have some inflation problems and somewhat tighter policies have been put in place but we argue that, at least in much of Asia, the heavy capex spend has resulted in substantially reduced bottlenecks and the markets may as a result be overemphasizing the inflation risks in some of these economies, particularly in China.
Whether the emerging markets can successfully meet these expectations is anybody’s guess.
They further note:
If our analysis is correct, the catalyst for this reversal is likely to be the valuation gap that opens up between developing and developed markets, particularly the US, that would entice a reversal of fund flows.
Of course, the very definition of emerging market might be changing. Read more on this trend