The trade for the rest of the year is "Short DM, long EM".
With QE2 coming to an end and the Euro land falling apart, there are no positive triggers for the DM part of the world. The DM market is still pondering whether the recent slowdown in the job market is a sudden skittish stop in the economy or couple of months of slow job growth. People have still not fully factored in the lack of QE3 in the coming months.
On the other hand, the EM market has gone through the pain of correction in the first half of the year with most of the indices correcting 10-15% and now have reasonable sub to mid teens valuations. Also, prices of crude oil have moderated to sub 100 levels and central banks have taken measures to curb inflation. More specifically, for India the current rate hike may be one of the last few rate hikes.
For emerging markets, a key question is where the next margin improvement will come from. If improvement does not materialise, we could see a trading range for emerging market equities, but if the market realises that company margins over the next few quarters are sustainable, the stock prices should start rebounding gradually and consistently. I think there will probably not be a huge uptick, but more a steady improvement for the rest of
2011 on an absolute and relative basis. This should compare favorably in comparison to DM's which are bracing for lack of liquidity, high unemployment rates and possibly inflation (the dreaded stagflation phenomenon)
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What about the interest rate hikes due to inflationary problems (demand driven)and the consequent slowing down of EMs. Both China & India are slowing down, lot of projects are economically unfeasible due to higher lending rates, consumption has slowed down due to higher fuel & food costs. EMs have factored in a lot of growth and any slowdown for next 2-3 quarters will have another 10-15% correction. Also, with US interest rates likely to go up after 2 quarters, the FII inflows might start drying up.
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I personally feel, Hold DMs, Short EMs