EM Strategy: Where We Are in the Rally

We have reason to be rallying and challenging the view that emerging markets are due for a pullback.  

PMIs are rising with record-low interst rates and cost of production in the EM economies, yield curves are steepening, and analyst earnings measures are turning positive.

But what are the risks? Is this a bear market rally, built upon the fundamental factors of the stabilization in the G3 and acceleration in demand in emerging markets?  There is an extraordinary stress test to the decoupling arguement.  EM economies are last into a recession and, convincingly, the first out. But while the degree of decoupling is without argument, the degree to which is measure for debate.  

Will we go back to levels of September last year prior to Lehman's fall? Personal savings rates moving from 4-9% (average of 1970 -1980s) will be a global demand shock. The estimates of personal savings rates understates the actual number, which may be above 4%.  The pace of unemployment or underemployment is increasing. This will have a bigger effect on consumption. And a longer term increase in fiscal deficits (which leads to higher taxes and interest rates in the G3) will lower returns from these economies.