Monday, February 21, 2011

Emerging markets have lost luster

Emerging market stock indices have been on a decline since November. For some these markets have lost their luster, yet growth in the emerging markets should well top the growth in the developed markets. Does this make sense?

This is where the inflation story in emerging markets is useful. Many emerging market central banks have started to raise rates in an effort to stop inflation. For example, the India central bank has increased rates seven times since March in order to cool the economy. The impact on stock prices is being felt. Until it is viewed that central banks have some control over emerging market inflation, we will see weak equity markets. The weak inflation in G1o countries with continued easing monetary policy seems to be more attractive to global equity investors.

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