Is the emerging market rally a red herring?

The table below details the performance of 78 stockmarkets around the globe in the year to date. 

Close to 60 are in black, with a dozen posting double digit gains in the first few weeks of 2012 alone.

But although this clutch of top-performing indices is dominated by emerging markets, it is by no means an indication that the fight back from EMs is beginning after a tough 2011, when globally these underperformed their developed world peers at an index level and across all sectors.

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Although interest in global emerging market equity and bond funds has now returned to 2Q11 levels - when investors turned their back on Anglosaxon markets as the supply of cheap money ran dry - the crosswinds whipping global emerging markets have refused to die away.

The most obvious threat comes from liquidity withdrawals, a risk that some of the strongest indices highlighted in Bespoke Investment Group's table are most vulnerable to.

Viktor Shvets, Samsung Securities strategist, argues that the likes of Hungary, which ranks toward the top of the table, is particularly at risk and from a trading perspective investment in these markets might at times make sense (if oversold) classic signs of liquidity pressures, like twin deficits, high debt, high exposure to international banks, and significant short-term roll-overs, is too high risk.

'In our view, this makes any investment in CEE (particularly Hungary and possibly Turkey) challenging and also makes it difficult to recommend investing in India,' Shvets said.

EMs win over DMs...for now

But there are some emerging markets riding high in this table that are still worth a look at.  While Shvets fears the impact of a sudden withdrawal of liquidity from those in central and eastern Europe, he argues that the likes of China, Taiwan, Indonesia and Korea are far better positioned, as well as Brazil, which over the past decade has boosted its productivity and reduced its vulnerability to the withdrawal of external liquidity, even if its economy has a narrow base.