Murray, a former colleague used to say that “emerging markets are markets you can’t emerge from in an emergency.” But is the emergency now over?

Having worked in the emerging bond markets, I know very well that foreign investor flows into this asset class tend to be all one-way.

When people are buying, price gains can be spectacular. If they’re trying to sell, watch out.

In view of this potential illiquidity, it’s unsurprising that banks’ emerging market analysts spend a lot of time navel-gazing, trying to work out if fund flows are too unidirectional and if a sharp reversal is due. In the report by Alex Redman of Credit Suisse that you mention, he suggests that 10 weeks of net inflows to emerging market equities warrant a contrarian stance of investor caution.

If you’re a tactical trader, you’ll be paying close attention to such figures. But what do fundamentals suggest that investors should do?

An excellent BIS annual report, which was released a couple of weeks ago, highlights the extent to which private sector capital flows into emerging markets went into reverse at the end of last year. (See graph V.7 on page 84 for a graphical illustration of this point.)

As the BIS says in its report summary, there is the risk of a destabilising negative feedback loop in emerging market economies (EMEs): “The severity of the downturn could deter a recovery in capital flows to EMEs, which could in turn further impair growth.”

Despite the strong rebound in emerging market equities so far this year, is there any real sign that cross-border credit flows are going to return to precrisis levels?

The other option is for emerging markets to finance their expansion via domestic demand and domestic bond markets, but this remains a relatively underdeveloped and untrusted area in many countries.

In Russia, for example, at the peak of the emerging market panic in the autumn, locals went straight back to the tried and tested way of buying foreign currency cash, causing the ruble to drop.

It’s also revealing to look at what’s happening at the company level in the emerging market economies. One of the best articles I’ve read this year, written by Evan Osnos, China staff writer for the New Yorker, tells of the rags-to-riches rise of Nine Dragons Paper and its founder, Cheung Yan.

Yan, who is known as the “Queen of Trash” in China, dominates the business of recycling American used paper into cardboard boxes for packaging Chinese exports, and her company runs the largest paper mill in the world, in Dongguan.

From a starting capital of US $8,000 in the late 1980s, Yan managed to secure American wastepaper export contracts by the early ’90s, and her company then entered a relentless rise that took her to the position of China’s richest person in 2006.

In 2008, however, Nine Dragons nearly collapsed, brought low by overexpansion, misjudgment of the level of export growth, and too-heavy reliance on debt financing. The company, whose shares are listed in Hong Kong, saw its share price fall by nearly 90% in the course of the year. Osnos points out in his article that, at the lows reached in November 2008, the company’s market value was only half that of its huge paper machines.

Since then, a commitment to cut back on expansion projects and to repay some debts early has helped Nine Dragons’ share price to recover tenfold from its lows – from HK $0.71 in November to HK$7.10 today – though it is still well below the record high of HK $26.25 reached in 2007.

Nevertheless, future prospects are far from clear. China’s long-successful business model, which has been based on cheap, unprotected labour and low margins, is under threat, argues Osnos, as the increasing wealth divide threatens political unrest. With the boom times for Chinese exports probably over, too, the meteoric growth phase of companies like Nine Dragons must also have ended.

It looks as though many emerging economies are facing huge economic changes, which will fundamentally alter the distribution of wealth and power. Just as Western economies are struggling to reorient themselves after two decades of debt-led consumption, a change from export-driven growth in countries like China will require some painful readjustments.

While there seems little prospect of a return to the lows in emerging equity markets, there seem plenty of reasons why it won’t be plain sailing ahead, either.