SummaryA fresh flood of central bank liquidity has boosted selected asset class categories across financial markets.Perhaps nowhere has this phenomenon been more profound than in emerging markets.Any future shifts in monetary policy may result in a notable bout of pain for those that are unwittingly along for the ride.Emerging Markets Off To The Races In 2016, But What About The Future Performance across emerging markets has been exceptional in 2016.Leading the way has been emerging market bonds (NYSEARCA:EMB), which I declared in an article last month as the scariest investment in today's market.The returns performance this year has absolutely been impressive, as the category has rallied by as much as +19% from its January lows not long after the start of the year.Such are returns that would turn the heads of most stock investors.Unfortunately, these robust gains have come despite increasingly deteriorating economic fundamentals of the issuing countries behind these bonds along with historically narrow spreads relative to U.S.

Put simply, investors are not being paid for the increasing risk they are taking on with these securities, yet they have been bidding them up throughout the year in a relentless chase for yield.Not a good combination for future returns prospects going forward.Emerging market stocks (NYSEARCA:EEM) have also soared in 2016, having rallied by as much as +40% from its January lows.Unlike emerging market bonds, at least it can be said that emerging market stocks bounced from oversold levels and still remain below their highs of the last few years despite their recent strength.But even with this point of reassurance, the outlook for emerging market stocks is just as troubling going forward.What is the concern for emerging markets?After all, isn't the recent price strength we have seen throughout 2016 a sign that things are on the mend?Unfortunately, the answer is flatly no.The global economic outlook across developed markets remains sluggish at best and has already started to slowly roll over in many parts of the world.

As for emerging markets themselves, the fiscal health of many of these economies remains precarious.Much of the growth that has taken place across emerging markets during the post-crisis period has been fueled by the steady flow of liquidity that has flooded into the financial system, thanks to endlessly generous global central banks.The problem that has resulted is that the rate of increase in borrowing has run well in excess of economic growth for many of these countries in recent years.Such a condition is sustainable as long as borrowing costs remain low and liquidity continues to flow, but can quickly become disrupted once borrowing costs start to rise or central bank stimulus programs subside.This is particularly true if this comes in an environment where the U.S.dollar (NYSEARCA:UUP) is strengthening relative to local emerging market currencies (NYSEARCA:CEW).Unfortunately, for emerging markets, all of these negative credit forces may be on the brink of playing themselves out.According to CME Fed Fund futures, the U.S.

Federal Reserve stands ready to raise interest rates by 25 basis points following its next press conference policy meeting on December 14 (I will, of course, believe it when I actually see it).At the same time, the European Central Bank and Bank of Japan are both struggling with the future direction of monetary policy as their negative interest rate and asset purchase experiments are proving futile.mercedes benz bitcoinMoreover, emerging market giant China (NYSEARCA:FXI) and its People's Bank of China has recently been in the process of draining liquidity in order to curb speculative real estate activity and bond investing leverage.ptc pay bitcoinPut simply, what has been a decidedly supportive monetary policy and credit environment for emerging markets in 2016 may become decidedly different in the coming months.bitcoin buyer in pakistan

So Many Wagons Hitched To The Emerging Market Stock Ride OK.So emerging markets may be in for tough slog going forward after a tremendous ride higher in 2016.the U.S.-based investor might exclaim.I'm not much interested in emerging markets anyway, one might say, and as long as I stay focused on my high-quality U.S.ethereum coin futurecompanies, I have nothing to worry about in this regard.bitcoin in urduIf only it was that easy in today's deeply interconnected and policy mixed up financial market world.kurs bitcoin usdFor it is not just restaurant giant and KFC owner Yum!greece bitcoin exchangeBrands (NYSE:YUM) whose fortunes are directly tied to emerging markets in general and China (NYSEARCA:GXC) in particular.bitcoin seed bank

In fact, the upcoming separation of the higher growth potential and risk associated with Yum!'s China operations from its slower growth and more established U.S.-based business was motivated in part by the recognition of this close relationship.But given that China is the still growing second largest economy in the world with product demand that stretches across a variety of cyclical industries, many U.S.-based companies have seen their stock price performance wagon almost directly hitched to the fate of emerging markets.bitcoin fee too lowAnd this includes some of the highest-quality dividend growth companies in the U.S.Let's begin with a look at the most obvious example in Caterpillar (NYSE:CAT).The Dow component has long had its price performance closely tied to emerging markets for obvious reasons, as a great deal of natural resource extraction and construction activity either occurs or is dependent upon emerging markets including China.

As a result, if you own a cornerstone U.S.corporation like Caterpillar, you are effectively letting your ticket ride with a direct bet on emerging markets.This is just one of many examples of companies whose fortunes have been almost perfectly correlated with emerging markets in recent years.The following are price charts for other industrial (NYSEARCA:XLI) giants including United Technologies (NYSE:UTX), Emerson Electric (NYSE:EMR), Dover Corporation (NYSE:DOV), Parker-Hannifin (NYSE:PH) and Textron (NYSE:TXT) just to name a few.In all of these cases, ownership in these high-quality companies, many of which are bedrock, buy-and-hold stocks in the portfolios of conservative dividend growth investors, have effectively turned into proxies for an emerging market stock allocation.This phenomenon is not limited to the industrials sector.The natural next place to investigate for such a relationship is the commodities sectors of energy (NYSEARCA:XLE) and materials (NYSEARCA:XLB), whose products have been heavily produced and consumed by the growing China economy and its emerging market brethren over the years.

After all, the price of oil itself has closely tracked emerging markets (NYSEARCA:USO) in recent years.Beginning with the energy sector, some of the most well-regarded and highest-quality stocks such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Occidental Petroleum (NYSE:OXY) and EOG Resources (NYSE:EOG) have seen their price performance track very closely to emerging market stocks in recent years.Same with many of the metals and mining stocks out of the materials space including U.S.Steel (NYSE:X), Nucor (NYSE:NUE), Freeport-McMoRan (NYSE:FCX) and Alcoa (NYSE:AA).What is particularly notable among these metals and mining stocks above is the recent relative weakness of Freeport-McMoRan and Alcoa relative to the emerging market stock index.This is a deviation worth monitoring closely going forward, as such relative weakness in such metals producers may be a leading indicator of what may be to come for emerging market stocks in general.Now as an investor, you may still be reassuring yourself by thinking that you have a defensive bias in your portfolio and are avoiding these more cyclical stock segments.

Even if this is the case, such emerging market and China interdependence may also be leaking into your high-yielding securities portfolio.Certainly, investors in master limited partnerships (NYSEARCA:AMJ) have become well versed in the volatility that can come with having your big income stock securities tethered to emerging markets.And so too have investors in high-yield bonds (NYSEARCA:HYG) that have traveled on a wild ride to the upside and downside in recent years.The same can be said for convertible bonds (NYSEARCA:CWB), which have been traveling side by side with emerging market stocks for some time now.The Risks Of Unwittingly Hitching Your Portfolio To A Wild Horse All of this has important implications for U.S.-based investors.Emerging market stocks are a high-risk asset class prone to wide price swings both to the upside and the downside.And over the past decade, the performance of this market segment has been poor on a risk-adjusted basis, as it continues to trade below its 2007 all-time highs and has delivered one heck of a stunning -67% drawdown along the way in 2008 with a few other jarring drops including a -40% decline from mid-2014 through early-2016.

In short, it has been a very long time since long-term investors have been rewarded for taking on an allocation to emerging markets.With this in mind, conservative or even moderately aggressive U.S.-based investors should take note of the high correlation of a number of high-quality U.S.stock institutions as well as a number of other distinct asset classes that have all effectively hitched their price performance wagons to the emerging market stock index in recent years.This is not to say that U.S.-based investors should completely avoid a dedicated allocation to emerging markets in a diversified portfolio strategy.Indeed, a few percentage points dedicated to emerging asset classes can provide a positive diversification benefit over time.But the fact that so many U.S.stocks and asset classes have become so closely correlated to emerging market stocks in recent years implies that conservative investors may unwittingly have effective allocations to emerging markets totaling 20% to 30% or even more depending on the specific composition of their portfolio allocation.

This is an unacceptable mix in any market environment, particularly one such as today where emerging markets have rallied so strongly on the back of a credit growth expansion that may prove unsustainable after not too much longer.Thus, a portfolio review may be in order to determine exactly what your implied emerging market stock exposure may actually be today, for it may end up being much higher than you would ever imagine.And for a category that has been so volatile and gone so unrewarded over the past decade, such exposures are hardly worth it.Disclosure: This article is for information purposes only.There are risks involved with investing including loss of principal.Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made.There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.