"Emerging markets' valuations have been forced higher as investors have flowed into EM assets, including currency, equity and debt," the group said in its annual economic analysis.
"It was noted that supply of debt is not high enough to absorb demand, squeezing yields lower. While this could have further to go, we must prepare for the possibility that a bubble is developing," the report added.
The view comes in spite of investor enthusiasm for the region, and the IMA Global Emerging Markets sector's consistent outperformance of its geography-based peers.
Performance of regional IMA sectors over 3-yrs
Source: Financial Express Analytics
The analysis, published by IFA Seven Investment Management, said there was not a concern over the economic outlook for the emerging markets region, but a worry that investor demand may push asset valuations to unreasonable and unsustainable levels. The group added that profitability of EM companies can be poor when compared to Western multinationals.
The AIFA favours blue chips, saying the position of large companies looks strong.
"Big firms in aggregate have strong balance sheets, with high levels of cash held by many, and are reporting robust profits, buoyed by exposure to developing markets overseas," the note said.
The report also points to Japanese equities, calling them cheap.
"Japanese equities are...trading at a discount to book value. If the Bank of Japan intervention in FX markets succeeds in capping the yen's rise, this could be supportive for equities," the note said.
Looking into 2011, AIFA director Robert Sinclair is optimistic, but says key issues still need to be addressed.
"The high levels of personal and public sector debt have not been worked through and addressing this will be a prolonged and painful process. It would be wrong to be complacent about this and believe that the effects of the crisis have passed already. Lower availability and demand for credit in the broader economy will dampen growth below the levels we have been accustomed to for two decades," he warned.
He added: "Despite the obvious difficulties being encountered in a number of Eurozone countries the risk of a double-dip recession still appears less likely. There appear no risks on the horizon that will turn markets yet. The world economy is gradually being restored."