UBS: Don’t be Fooled by Emerging Markets' Winning Streak

The 'great migration' into emerging-markets assets should be seen for what it is — a straightforward yield grab, not a vote of confidence in the developing world's growth story.

That's the view of UBS Group AG strategists Bhanu Baweja and Manik Narain, who say that even though emerging-market securities are gaining favor as developed markets get increasingly expensive, fundamentals won't fulfill the hype. Investors rushing into riskier economies should take note, they warn, because when growth doesn't follow through, cheap valuations might end up looking expensive very quickly.

"The classic sequence of 'what markets know today, economic data confirms tomorrow' may not play out as elegantly as it has in the past," Baweja and Narain wrote in a research note to clients last week. Although emerging markets have rallied hard through 2016, with equities trading just off a 13-month high at 8 a.m. ET on Wednesday, "the follow-through into hard economic numbers has been weak."