Emerging Markets Riding the Wave

Emerging market economies have gone gangbusters in the last 5 years. In a world awash in liquidity, the flow of funds into emerging market stock markets has been tremendous. Not only are these emerging economies growing much more rapidly, they are producing goods and services competitively and building infrastructure. What do they need?: steel, aluminum, cement, oil, electricity, water, etc. As investment dollars have flowed into these emerging economies, returns have continued to be quite healthy despite the eventual compression of returns caused by large asset flows over time.

Some posit that the "disappearance" of risk in emerging markets will lead to an implosion. Perhaps, though it could be that there is simply lower volatility because of a credit upgrade cycle in emerging markets. As these economies grow and mature, these countries' debt goes through an upgrade cycle, which has the effect of improving the balance sheets of these countries, which in turn benefits the companies doing business there. As the level of risk appears to drop, even more fund flows enter these countries seeking higher returns from these higher growth economies with improving risk-adjusted fundamentals.