World watch - Too much money chasing too little market cap ..........

WARNINGS that emerging markets are inching toward bubble territory are misplaced so far but the volume of securities on offer must rise fast to accommodate the new cash that is expected to join the sector in coming years.

Emerging assets have become very desirable as the financial crunch damaged western balance sheets and budgets and further enhanced the relative growth attractions of the emerging world.
With emerging markets roaring back from the slump of 2008, crises in the likes of euro zone mem- ber Greece -- and also two years ago in Iceland -- have challenged decades-old assumptions that sovereign risk was inherent only to developing economies.
In theory, that should be a positive for emerging markets, which are on the whole, hugely underrepre- sented in global portfolios, especially of more conser- vative but cash-rich investors such as pension funds.
But the reality is that relative to the developed world, emerging bond, stock and currency markets remain underdeveloped, small and illiquid. Which means a large-scale cash influx can quickly inflate asset prices to unsustainable levels, risking a repeat of the familiar boom-bust emerging market cycles.
"Too much money chasing too little market cap -- potentially it's a concern," said Michael Wang, emerging equities strategist at Morgan Stanley. "It was a concern in 2007-2008 when there was a lot of euphoria over emerging markets and this wall of money came in. We are starting to see that kind of euphoria again."
The 37-country MS- CI emerging markets index has market capi- talisation of $3 trillion -- just over a tenth of the MSCI World's $20.5 tril- lion and a third of the US S&P 500. And the $5.5 trillion in local currency bonds issued by every emerging nation in the world are worth less than the US treasuries outstanding.
Flows are tipped to grow, as the pull of emerging markets -- rising incomes, growth, relatively sound public finances -- coupled with "push" factors from the developed world -- anaemic growth, falling popu- lations and rising debt.
Emerging equity and bond funds got inflows of $75 billion in 2009, dwarfing all fund groups except US bond funds.
This year, private capital flows -- direct and portfo- lio investments -- to emerging markets will rise 66 per cent to $722 billion, the Institute for International Finance (IIF) says. That is over three times more than levels a decade ago, IIF data shows.
There are signs pension funds, pressured to boost returns, are increasing emerging market allocations -- a Barings study last November found a third of UK pension funds would consider investing in emerging markets, up from under 5 per cent in 2007.
The problem is that even a small re-allocation from a deep market to a relatively shallow one can cause substantial swings.
Take for instance pension funds. With $23 trillion in assets globally, just a 1 per cent extra allocation to emerging stocks would bring inflows of $230 billion -- almost a tenth of the existing market capitalisation of the MSCI EM.
Volumes of existing securities would have to rise by a comparable amount, possibly via stock listings, to avoid the wild swings such large-scale capital inflows would cause.
"With all this money flowing in, we are going to see an inflation of price-earnings ratios," said Robert Ruttman, emerging equities strategist at Credit Suisse.( the bottomline is grab stock having low p/e as they will have a long way to go...from low p/e to average p/e and then inflate p/e and I have not to mention which can be those!)
"It is important to watch earnings growth relative to volume of funds coming in."
So far he says valuations are looking fair around 11.5 times one-year forward earnings or a 13 per cent discount to developed stocks and a 10 per cent below their own historical average.
If earnings keep up, emerging markets could justi- fy a premium to developed markets on a P/E basis, ana- lysts say.
"A bubble implies there is not a fundamental under- pin to the price," Wang said. "At the moment this is not the case."

My Comments:
I think everything is there to read.I have already highlighted it......what one needs to do is just take the clue....for e.g..it is written about Pension Fund....having $23 trillion asset globally and even 1% will bring in $230 bn!
So read this post properly and take clue.......