Three months into an emerging market rally, investors are still waiting for the uptick in growth and exports needed to keep the rebound from fizzling out.
So far, the rally has been about investment funds re-positioning after long avoiding what are markets with a track record for volatility. Now they are closing their eyes to a dour economic picture and betting long-term valuations are cheap enough to warrant some exposure.
But after a horrific 2015 and a new year meltdown transformed into double-digit returns for bonds year-to-date and an 8 percent gain for emerging equities, evidence of economic recovery remains the missing link (http://reut.rs/1Rx8jLT)
Bank of America Merrill Lynch is the latest to turn positive, advising clients on Tuesday to "get off the fence" and buy emerging equities.
The big question is whether this can last.
Some reckon not, arguing gains are driven primarily by U.S. Federal Reserve backpedaling on interest rates, giving temporary relief to developing economies by deflating the dollar and spurring a commodity price recovery.
Yet stubbornly weak growth in the developing world will hobble emerging equity markets in time, they argue.
The International Monetary Fund recently cut 2016 growth forecasts for developing countries to 4.1 percent. But for the 19 biggest emerging economies, the average growth rate is worse, standing 1.6 percent above that of developed peers, the narrowest gap in 16 years, according to UBS research.
In 2009, this premium was 7.5 percent, UBS says, noting strong correlation between the growth gap and capital flows to emerging markets.
What's more, investors have seen this kind of bear market rally before. Morgan Stanley identifies this as the ninth "counter-trend" rally since emerging equities turned negative in late 2010.