Interesting piece on Bloomberg about how rising frontier markets may indeed signal the death knell for the 2Q global equity rally.  Much like a pendulum moving out and then back, the rally may be peaking along with the recent rise by illiquid assets.  Think of equities alone as having their own ‘risk curve’; that is to say, the further out on the curve you go, the riskier the asset, and presumably the higher the potential yield.  Greater market liquidity at any given time will generally correlate with further movement on the curve.  So as green shoots sprouted this spring and into the summer, and as the VIX begin to wilt, investors’ thirst for something a little further out on the curve has been increasingly hard to quench.

MSCI’s frontier index has risen 21% since April 30, including its best month ever in May, while the emerging market index is up 17%.  Vietnam’s VN Index led the surge, jumping 34% since the end of April on the heels of a meaty government stimulus.  Sri Lanka’s Colombo All-Share Index’s climbed 32% in that same period.  But the theory among some analysts now, however, is that this trend will begin to unwind.  “Markets that have had the largest moves to the upside recently will be susceptible again to very strong sell-offs,” remarked Beat Lenherr, chief global strategist at the Singapore-based LGT Capital Management.  The frontier index trades at 11x profit, for instance, right around what it was showing last September before caving in.  And both developing market indices are down over 5% since mid-June, signaling a peak has already been formed.