Short history chart but nevertheless very telling and compelling from my standpoint.
Emerging market stocks are no longer cheap and already reflect a lot of good news, leaving them vulnerable to even minor disappointments.
Emerging market (EM) equity multiples have moved significantly higher in recent months, based on various valuation measures. A further multiple expansion in the developing markets would represent an overshoot of valuations from fundamentals. Indeed, there are two potential scenarios for EM stock prices: either a full-fledged mania will develop with multiples continuing to expand, or, a setback/period of indigestion will occur before a new upleg develops. Currently, the odds of a mania-type pattern developing in emerging markets are not significant. If a mania were to develop, Chinese stocks would be at the epicenter because China has the fastest growth rate. However, Chinese share prices (both domestic and investible stocks) have been trending sideways since July, and the investible market has underperformed the emerging market benchmark. Bottom line: At current valuations, EM stocks will be increasingly vulnerable to even minor negative surprises. Stay tuned.