For now, emerging markets bask in glory as they poach quality moniker from ailing developed markets – but a bubble looms.

Anyone who thought that a taste for emerging markets was just a fad, generated by modish and over-satiated western investors, will have to think again. Amid what is frequently described as a repricing of risk across all the capital markets, far from going out of fashion or succumbing as the first victims of the liquidity crisis, emerging markets are now a safe bet.

The customary flight to quality during a period of turmoil is, for the first time, seeing an exodus to a diverse range of emerging markets, away from developed economies. According to Emerging Portfolio Fund Research, more than 80% of the $29bn in net fund inflows to emerging markets this year arrived in the two months following the outbreak of the credit crisis in August. In the same period, US, European and Japanese equities saw net outflows of billions of dollars. What is more, the MSCI Emerging Markets index rose by one-third in the two months after August 18.

In the black

Equally significant is that emerging markets will soon become net creditors for the first time, a contrast to previous financial crises when high levels of debt imperilled so many developing economies. Data from JPMorgan shows that corporate bond issuance from emerging markets far outstrips sovereign borrowing. The amount of debt issued by emerging countries has halved since 2004 when it stood at $66bn. While corporate issuance has been growing, JPMorgan believes corporate emerging market borrowers would not be hard hit by another credit crisis.

The BRIC countries (Brazil, Russia, India, China) in particular are stronger than ever before, boosted by commodity prices but also by shrewder economic management, and they are more eager to lure in foreign investors. There is evidence too that emerging market countries have been astute in other ways, notably in the use of technology to strengthen competitiveness, according to a recent report by the Economist Intelligence Unit.

Some analysts are already talking of an emerging markets bubble. But for the moment, the overall picture of robust good health means that the Asian financial crisis of 1997, the Russian default of 1998, and the Latin American crisis of 2001 all seem lost in the realms of sepia photographs.

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