LUXEMBOURG Emerging markets remain an investor favorite for their long-term economic growth prospects, but some investors have begun to question the sustainability of short-term gains.
Too much money is chasing too few assets, the argument goes.
A Reuters European Fund Summit in Luxembourg this week heard both sides of the story -- reports of huge demand from fund managers on one hand and notes of caution from strategists on the other.
LGT Capital Management went as far as saying that along with gold, government bonds and exchange-traded funds, emerging markets could be heading toward bubble trouble.
"There are some potential bubbles," said Marcel Schnyder, LGT's head of multi-asset investment management. "It could happen in gold (if everyone goes in). The same thing in emerging markets."
The gist of the concern about emerging markets is that there is a huge amount of money flowing toward a limited number of investments. That drives up the price, sometimes beyond a reasonable level.
Such a prospect has made the likes of Banque de Luxembourg not only cautious, but underweight in emerging markets.
"There was so much money going into Asia last year, we thought it might be better to wait for a correction," said Guy Wagner, the wealth manager's chief economist.
Asia is not Wagner's least favorite center of emerging markets. His firm is more underweight in both eastern Europe and Latin America.
There is little argument that emerging markets have been -- and, for the most part, remain -- very popular among investors.
Flows into in emerging market funds tracked by EPFR Global hit a nine-week high in mid-March, with all four of the major regional groups posting inflows.
Asia ex-Japan equity funds led the way, taking in a net $730 million for the week ending March 17, while flows into Latin America equity funds hit an eight-week high and EMEA equity funds extended an inflow streak to four straight weeks.
There was also evidence of demand on display at the Reuters summit.
Manooj Mistry, head of exchange-traded fund structuring at Deutsche Bank, said investments in emerging market ETFs had risen to as much as $3.7 billion from $2 billion a year ago.
Among areas picking up were frontier markets. Deutsche Bank has a Vietnam ETF and Mistry was looking ahead to the possibility of the United Arab Emirates, Indonesia and locally-traded China shares.
There were also signs retail investors were beginning to join institutional counterparts in embracing emerging markets.
Andrea Favaloro, European head of retail for BNP Paribas Investment Partners and Fortis Investments, said his retail clients were starting to move into riskier assets, particularly emerging markets. "They really realize what is happening there, particularly in Asia and Brazil," he said.
Indeed, BNP/Fortis launched an emerging markets capital protected fund before they unveiled one for U.S. stocks.
The problem with meeting this growing demand is that emerging markets have already grown dramatically and may be showing signs of strain.
MSCI's main emerging market stocks index .MSCIEF doubled during last year's rally, far outpacing developed markets.
But without much notice, they have been wobbling this year.
While developed stocks as measured by MSCI .MIWO00000PUS are up 2.8 percent for the year to date, the emerging market index is barely into positive territory.
It is not the kind of short-term performance that builds confidence in what is widely expected to be a volatile year. "Speaking as a retail investor, I would be cautious," said Noel Fessey, managing director for Schroders in Luxembourg, who worries that his clients may be assuming they are moving into an automatically rising market.
(Editing by Dan Lalor)