A post in November suggested that emerging equity markets were losing their lustre, with anti-inflation policies likely to slow growth in 2011 and valuations looking ambitious relative to developed markets.

Prices are bouncing today but, as of Friday's close, emerging markets had lost 5.1% year-to-date in US dollar terms versus a 5.0% gain for developed markets (MSCI return indices). The recent setback has wiped out outperformance since September 2009 – see first chart.

Three of the four BRIC markets look in trouble. Chinese and Indian three-month market rates have risen by 200 basis points (bp) since November. A sharp deterioration in China's trade balance in January partly reflected holiday distortions but a surge in imports is consistent with overheating – second chart. Indian banks' three-month funding costs are now more than 100 bp higher than the 10-year government bond yield, implying restrictive policy. In Brazil, real narrow money, M1, has contracted over the last six months. Russian monetary conditions are loose currently but inflation is picking up strongly.

Six-month growth in E7 industrial output strengthened in late 2010, as did a composite leading index derived from the OECD's country indices. A "double-lead" indicator based on the short-term momentum of the leading index, however, weakened in November and December, signalling a peak and slowdown in output momentum this spring – third chart. With a likely further rise in inflation precluding policy loosening, markets may fret about an economic "hard landing" later in 2011 and 2012.