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The rally in emerging markets: Should you get in?

People pass in front of the Brazilian Stock Exchange, Bovespa, in Sao Paulo, Brazil.
Nelson Almeida | AFP | Getty Images
People pass in front of the Brazilian Stock Exchange, Bovespa, in Sao Paulo, Brazil.

A number of people asked me to expand on my recent comments on the rally in emerging markets, with the Emerging Market ETF (EEM) hitting a 52-week high (see my earlier Trader Talk for more).

They've asked me to explain why.

I'd like to say that emerging market economies are turning around and growing more aggressively again, but I don't see a lot of evidence to support that.

So why the rally? One factor—the main one, in my opinion—has been continuing low global interest rates. Rising rates are an absolute killer for emerging markets.

Risk appetites have been strong as the Fed has insisted they will not be raising interest rates any time soon.

But there may be an additional factor that has been an historic issue in emerging markets: elections.

Brazil's stock market has been on a tear in the last month as it looked like incumbent Dilma Rousseff (not perceived to be a friend of the markets) might be in trouble.

In Indonesia, the main JSX index is up nearly 5 percent this month (leading Asia), as markets came to believe that Joko Widodo might be able to win election and turn that country around. He wasdeclared the winner in a tight election a couple days ago.

Turkey's stock market rose in March when Prime Minister Recep Tayyip Erdogan's party swept municipal elections, reducing the chances of political turmoil. It's rising again this month, since he is facing an election August 10.

In India, when it looked like reformist Nasendra Modi might win, their stock market rallied about 15 percent prior to the three months before he won election in May. Since his election, the stock market rallied an additional 20 percent to a historic high.

Developed markets can rally when there is a perception that the front runner may be a game changer. In Japan, the stock market took a huge turn before and after Shinzo Abe was elected. Just between June and and the end of July last year (when Abe came to power) the Japanese market rallied about 18 percent.

And that's what worries me: Japan has stalled out this year.

And India? It is at an historic high, but Indian stocks are already discounting a LOT of good news.

Same with Brazil. And Indonesia. And Turkey.

In other words, equity valuations do not appear cheap to me. And growth, despite low rates, has been stalling.

Low rates. High valuations. Low growth prospects. That sounds like one positive, two negatives.

—By CNBC's Bob Pisani

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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