MacroscopeFerocious foreign appetite for emerging markets poses risks
Developing economies are sturdier these days, but a sharp correction is still a possibility if overseas investors' current enthusiasm wanes
Janet Yellen, the chairman of the US Federal Reserve, is quick off the mark.
A mere 72 hours after the Bank for International Settlements published its annual report in which it warned that financial markets have fallen under the spell of global central banks' ultra-loose monetary policies, severing the link between asset prices and underlying fundamentals, Yellen issued a firm rebuttal.
On July 2, she said she saw no need to raise interest rates in order to head off potential asset price bubbles.
Yellen's dovish comments are music to the ears of investors in emerging markets who have rediscovered their enthusiasm for developing economies.
Yet the suddenness and sharpness of the shift in sentiment towards emerging markets this year - the mood turned from extremely bleak in January and February to positively bullish by May - suggest that investors' enthusiasm is purely tactical as opposed to a favourable reassessment of the fundamentals of the asset class.
Put another way, signals from the world's leading central banks, in particular the Fed, that they will maintain their ultra-accommodative policy stances has given investors sufficient reassurance to increase their exposure to risk assets.