The emerging market rally is getting frothy
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Emerging markets (EMs) are on a roll. The MSCI EM Index is up 11% (as on 18 April), while the MSCI World Index, a gauge of developed markets, has gained 4.9% so far this year. That outperformance by EMs is reflected in the accompanying chart, which shows the net overweight positions of fund managers to EMs have risen sharply in the last couple of months. Allocation to EMs is now at the highest level in the last five years, according to the Bank of America Merrill Lynch survey of fund managers for April 2017. The current level of allocation is 1.1 standard deviations above the long-term average.
While fund managers are still sitting on large amounts of cash, a net 32% of them feel that equities are overvalued, which is near a 17-year high. True, a net 47% of investors still believe EMs to be undervalued, but that is unlikely to hold true for Indian markets. Instead, Indian investors should take their cue from the frothy US markets, where a net 83% think the market is the most overvalued region, the highest response on record.