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Buyers should beware in rush for emerging markets

The revival of developing world capital markets is encouraging but investors should exercise a little caution.

Risk is back in the financial markets. Just look at the fact that assets under management at hedge funds jumped by $100 billion in the second quarter as investors begin to put cash to work again.

It is not just hedge funds that are benefiting from improvements in liquidity. Emerging markets are riding the wave too. Inflows into dedicated emerging markets equity funds this year are $32 billion, according to data tracker EPFR Global. There is also strong momentum behind bond funds investing in the developing world. These saw a 15th consecutive week of inflows in the week ending July 24, with those portfolios specializing in riskier local-currency debt accounting for more than half of the flows into the overall asset class.

These flows are being channelled into the capital markets. Three recent deals are testament to how far sentiment has changed over the past few months. In Qatar, gas company Ras Laffan LNG issued a triple-tranche bond for $2.2 billion. The transaction attracted $17.6 billion in offers – the biggest-ever order book for a Middle East bond.

In the equity markets, IPOs from China State Construction Engineering Corporation and BBMG, a Chinese construction materials maker, also attracted big demand.

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