Emerging markets’ illness small but persistent

FAR BE it for me to ruin your Monday but I am starting to get a bad feeling about emerging markets. Let me put that in context. On a medical scale I would call it more of a slight itch than a life-threatening condition, but it is definitely persistent.

HSBC knows a thing or two about emerging markets; the bank has just put out an index that says emerging markets economic activity levels have darkened. There is still growth but at a slower pace in the third quarter than previously, with Brazil, Russia and China all reporting falls in growth rates.

Fitch, the ratings agency, sounded more downbeat on China recently. The fact that ratings agencies did not cover themselves in glory at the height of the US credit boom means that they don’t want to be caught napping on China. Fitch’s central case is that China will grow on average nine per cent annually out to 2012 but it is very aware of the dangers of leverage and a flood of investment.

Talking of a flood of investment, last week reached new levels of emerging markets craziness when we saw staggering demand for Mexico’s century bond. When I first saw pictures of The World in Dubai, I immediately realised that this must mean we are in a property bubble – building islands shaped like countries set out as a big map of the globe just seemed emblematic of excess. So might lending money to the Mexican government for 100 years for a six per cent yield officially mark the start of a bubble in emerging debt markets?

And of course a wall of money might be exactly what is on its way. If the US Federal Reserve decides that the US economy needs more quantitative easing in order to create jobs, then the global financial system will soon be even more awash with cash looking for a home.

Many money managers have told me that it won’t be loaned to small businesses as the Fed might wish. Instead it will find its way into emerging markets.

Of course if you are in this for the long term then maybe none of this really matters.

Very few businesses tell us they know any better place than emerging markets to grow their businesses. And of course it takes more than just identifying a bubble to burst it.

Just ask UK home owners who rode the property boom for years before it came apart. Some say we are still in bubble territory here, but that is a topic for another day.

Anna Edwards co-anchors Capital Connection and is a presenter on Squawk Box Europe weekdays on CNBC. http://europe.cnbc.com