Investors caught in the middle of simmering global currency tensions are finding little option but to grab anything that is emerging markets as low rates and a falling dollar feed into a rush into high-yielding assets.
Key finance chiefs meeting in Washington and Seoul over the coming weeks will try to sooth tensions, intensified by Japan's currency intervention, expectations of more money printing in the United States and Brazil's measures to slow capital inflows.
But such flows into emerging markets are part of investors fundamentally rebalancing their portfolio, away from low-growth advanced economies into the emerging world which some estimate will generate 85 percent of global growth in the next decade.
Emerging markets are still under-represented in global market indices. For example, emerging markets account for $3 trillion, or only 15 percent of market capitalization of the benchmark MSCI world index.
"It's an ultimate paradox at the moment. Investors sitting on a neutral asset allocation are only exposed 15 percent to emerging markets. You're pushing at an open door when you are talking to clients about diversifying out of the West," said Michael Power, global strategist at Investec Asset Management.
"It has become almost indiscriminate. It used to be Growth At the Right Price. Now it's almost Growth At Any Price. We're moving from emerging markets as an option to a permanent feature in asset allocation portfolio."
Friday's worse-than-expected U.S. employment report reinforced expectations the Federal Reserve would introduce more monetary easing in November, pushing the dollar toward 8-1/2 month lows against a basket of major currencies.
"There's a massive credit upgrade cycle in emerging markets. That means capital gains. Advanced economies are riskier than emerging markets. That hasn't happened in my lifetime," said Ashok Shah, chief investment officer of London and Capital.
As flows into the emerging world snowballs, some investors are starting to flag risks surrounding the EM boom with currency politics over the next few weeks providing some caution.
After the weekend's meeting of Group of Seven and IMF officials in Washington, the Group of 20 finance ministers meet in Seoul later this month while U.S. mid-term elections are due on November 2.
Even with key currency talks and some measures to counter inflows, an investor stampede into emerging markets is showing no signs of abating.
Fund tracker EPFR Global said flows into emerging equities hit a 33-month high of $6 billion in the past week.
The Institute of International Finance raised its estimate of net private capital flows to emerging markets to $825 billion this year, compared with $581 billion last year.
The IIF said the biggest share of private capital flows is likely to come from portfolio equity investments by foreigners.
The MSCI EM index has gained 10 percent this year, hitting a 27-month peak in the past week. This compares with a meager 4 percent in the wider MSCI world equity index.
"Market capitalization remains small and the majority of global investors have only a fraction of EM exposure within their portfolios, despite the fact most major indices generated very little in the way of returns over the past decade," said Craig Farley, investment manager at Ashburton.
"We believe we are witnessing the start of a seismic shift in the other direction."
The release of key U.S. and European earnings in the coming week, including Intel, JP Morgan Chase and General Electric could bring investor focus back to developed markets.
That in turn will allow investors to analyze valuation so that they can go back to pursuing Growth At Right Price.
"The 1990s were about overoptimistic overborrowing booms in the emerging markets. The 2000s were about overoptimistic overborrowing booms in the advanced countries. The risk from these abundant flows of capital to EM economies is that the bubble could be on its way back to the EM world," Morgan Stanley said in a note to clients.
"Further, reserve war chests may limit macroeconomic damage if some EM investments turn sour — but these propositions are as yet untested."
© 2016 Thomson/Reuters. All rights reserved.