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We believe that one of the difficulties with employing simple arguments to posit that emerging markets have run too fast--or whether emerging markets have much more upside--is that we are in an era where historical comparisons largely lack relevance. With approximately $13 trillion in government debt trading at negative rates1, determining what “risk” is and what “rich” is have become exercises without comparative anchors. Nevertheless, the answers we read on Wall Street research still cling to the traditional concepts of comparisons between other periods of relative historical exuberance. We don't have a solid metric, but we suspect that historical comparisons will lead investors astray.

Without those valuation anchors and an ability to determine with confidence overall market valuation metrics, we think that following the historically reliable indicators that have been well correlated with investor returns remains our best investment path. Those indicators currently remain positive.

The key reason for that view is the stance of developed market central banks. The commitment to asset purchases remains intact at the Bank of Japan (BOJ), the European Central Bank (ECB), and the Bank of England. With so much debt subject to purchase by a price-insensitive buyer with an unlimited balance sheet, valuations seem to matter less than detecting whether those commitments are beginning to flag and if those central banks are returning to a more traditional policy framework. There is no sign of this development, primarily because those policies continue to show no convincing signs of producing results in the form of economic growth.

The exception of course is the Fed, which continues to jawbone markets when rate hike expectations sink too low and asset prices rise too high, too fast. The past week was a good example when one Fed governor stated that September was still possible for a rate hike, and at least one hike this year was suggested. Rate hike probabilities predictably rose, but the US dollar remained relatively unaffected. The chart below shows the last 10 trading days for the dollar, without a whole lot of volatility or a meaningful trend change to stronger levels.

We suspect that the market's sensitivity to such pronouncements is waning. The dollar remaining stable-to-weaker has historically been a very benign environment for emerging markets. Thus, we see little reason to guess that that environment will turn around in the absence of observable evidence.