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Has the rally in emerging markets already stalled?

Monday, 23 Sep 2013 | 4:04 AM ET
Bloomberg | Bloomberg | Getty Images

The Federal Reserve's decision to delay the widely anticipated tapering of asset purchases last week raised great expectations for a solid run in emerging market equities, but the party already looks to be short-lived.

"Just as the collapse in emerging markets assets [after] the May [Federal Open Market Committee] meeting was overdone, the current pace of rally since the September FOMC meeting is likely to peter out soon. The fundamental risks and potential growth drivers for emerging markets have not changed," Shweta Singh, economist at Lombard Street Research wrote in a research note.

After rallying between 3.4 and 4.7 percent on Thursday following the FOMC's decision to keep its extraordinary monetary stimulus intact, Indonesia's benchmark Jakarta Composite Index, India's Sensex index and Thailand's SET index have begun to give up gains. The indexes fell between 1.0 and 2.4 percent on Monday, their second session of losses since Thursday's post-FOMC rise.

(Read more: Emergingmarkets party as Fed stays put)

Federal Reserve Bank of St. Louis President James Bullard's comments Friday that the central bank could make a small cut to monthly bond purchases at its October meeting after a "borderline decision" in September have dampened sentiment, say market watchers.

Bullard's comments are once again forcing investors to re-think their expectations on U.S. monetary policy, which is holding the rally back, said Rob Aspin, head of equity strategy at wealth management group for Standard Chartered.

"We had taken the view that it would be short-lived rally, and that investors should consider using the strength to switch out of emerging markets to developed markets," he said.

(Read more: Emerging market 'multi-week rally' may loom)

"Expectations of a massive rally are over," added Kelly Teoh, market strategist at IG told CNBC. "It is a rally that defies real economic growth in the emerging Asian countries, which makes me cautious."

Trading emerging markets post-Fed meeting
David Mann, Head of Regional Research, Asia at Standard Chartered Bank discusses the impact of the Federal Reserve's policy moves on emerging markets.

With 12 Federal Reserve officials set to give speeches this week, according to Goldman Sachs, investors will be on the lookout for further clues on the central bank's next move.

Given looming uncertainty, Vishnu Varathan, senior economist at Mizuho Bank said that it is premature to declare a decisive turning point for risk appetite in markets.

(Read more: No taper! Did Bernanke fool the Street?)

"By holding back on the widely anticipated "taper" the Fed had unleashed a market rally. But it may be premature, if not outright misguided, to declare a decisive turning point for risk appetite. Point being, taper has only been deferred, not dismissed," said Vishnu Varathan, senior economist at Mizuho Bank.

By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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