Are emerging markets in a bubble, or just simmering?

That has been the topic of a lot of media discussion lately. And it’s been a topic for my subscribers since we put a lot of money to work in the developing world in early July. To learn what the smart money is thinking, take a listen in via this excerpt from a good  Bloomberg article published in the past week. Its angle was that two of the biggest bears on the 1990s dot-com era are two of the biggest bulls on emerging markets: “Barton Biggs warned of a US stock-market bubble as early as January 1997 and stayed bearish for most of the following three years as the Standard & Poor’s 500 Index surged more than 90% to a record. A decade later, Biggs says another bubble is beginning in emerging market shares. This time, he’s bullish. ”We’re only halfway along the way to a gigantic eventual bubble in the emerging markets,” Biggs, the managing partner of New York based hedge-fund firm Traxis Partners said. ”The emerging markets, particularly Asia, are a place where I want to have a really major representation. ”Biggs’s view is shared by Jeremy Grantham, chief strategist at Grantham Mayo Van Otterloo [who was also a bear on tech stocks in the late 1990s]. He wrote October 26 that his forecast for an ”emerging emerging bubble” was in ”splendid shape” after the MSCI Emerging Markets Index soared 146%in the past two years. ”While the 49% plunge in the S&P 500 from March 2000 to October 2002 proved Biggs, 77, and Grantham, 72, were right to warn of overvalued U.S. shares, their strategy now in emerging markets shows investors are increasingly seeking to profit from bubbles as the Federal Reserve increases its unprecedented monetary stimulus. ”Everyone and his dog are now overweight emerging equities, and most stated intentions are to go higher and higher,” Grantham, who helps oversee about $104 billion, wrote in a letter to clients. Developing nations’ faster expansion ”will give a powerful impression of greater value,” he said…. ”Grantham said that developing-nation shares will command premium price-earnings ratios in the next few years because of faster economic growth and lower debt levels. He recommended a ‘moderately overweight’ position in emerging-market equities…. ”Stocks in the biggest developing nations may double as the Fed’s stimulus sends valuations back to their 2008 peak, Dylan Grice, a global strategist at Societe Generale, wrote in a research report this week. He said call options on emerging-market equities may be the cheapest way to profit.” Here’s how I feel about it: We have done well with our emerging market positions this year. I am on high alert for potential danger, but so far the advances are supported by fundamental growth and values are in no way stretched.  Remember that many Southeast Asian markets have not yet even returned to their “Asian contagion” mid-1990s levels yet, as shown above. They’re much more like the U.S. in the early 1980s than the U.S. of 1999. Keep holding. For more insights like this, check out Jon’s daily advisory services Traders Advantage or Strategic Advantage.
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