beyondbrics

It was a long time coming, but the rally in Indonesia and other emerging Asian markets may have run its course. That at least is the view taken by Tim Condon, chief Asia economist at ING.

Condon has joined analysts at Morgan Stanley in cautioning investors about the high values of emerging market equities and bonds. Prices are not poised to fall, but “the capital markets have had a very powerful rally this year – and in Indonesia for two years – and at this point it looks stretched”, he says.

Indonesian stocks and government bonds, long shunned by cautious investors, attracted a massive $12bn in foreign capital this year alone, according to the central bank. The Jakarta composite index has surged nearly 40 per cent since January, after rising 85 per cent in 2009, lifted by inflows of $2.4bn. Bond yields are at record lows.

Thailand, the Philippines and Malaysia have also had “powerful runs”, Condon said.

The appetite for emerging market assets has been seemingly insatiable. Data from EPFR, the fund monitor, has shown consistent inflows for the past 20 weeks – with $47bn going into EM.

Condon’s call for caution is based on the following forecast: on November 3 the Fed is expected to announce unprecedented action to boost the US economy; this will encourage investors globally to shift money out of savings accounts and government bonds and into US stocks; and the Dow, he predicts, will jump 500 points in response.

For Asia, that means “it’s time to take a little bit of your money off the table, protect yourself from possible very serious headwinds to fixed income assets that I think will flow from the Fed’s unconventional easing.”

That’s a totally different story from the one told by chief emerging markets strategist Jonathan Garner over at Morgan Stanley. He believes the US economy, rather than rebounding, is leaning more toward a double dip recession, which could drag down world markets.

Either way, it’s time for you, investors, to place your bets. Please come back to us on November 4 for a review.

Related reading:
Bulls and bears battle over China’s ‘miracle’, FT
Guest post: Optimism about emerging markets is creating a new bubble, beyondbrics