With emerging markets seeing their worst four weeks in the last three years, should investors return to developed markets?

Stephen Docherty

Head of global equities, Aberdeen Asset Management

Emerging economies will be the engines of global economic growth for years to come. Investors should take a step back from current market concerns about inflation, political unrest, the strong inflows last year, valuations and improving sentiment for developed market equities.

The fundamental reasons why emerging economies have been growing at a much stronger pace than developed markets over the past decade (improved and more stable macroeconomic management and better corporate management, coupled with attractive demographics) remain very much in place. And they are not on a life support machine, unlike a number of the Western economies that are propped up by central-bank quantitative easing.

However, one does not necessarily have to own a company listed in a developing economy to gain exposure to emerging markets. Indeed, with recent valuations heightened in emerging markets, more attractive valuations can sometimes be found in companies listed in developed markets with meaningful exposure to emerging markets. So investors may find some attractive opportunities outside of emerging economy stock markets, but developing economies will continue to be a key growth theme.

Max King

Strategist and portfolio manager, Investec

Following a year of strong returns and record fund inflows, many were predicting emerging markets would underperform. Instead, the MSCI Emerging Markets Index returned 22.9%, 7% ahead of the developed market MSCI World Index, in sterling terms. With modest valuations, strong earnings growth and favourable economic factors, there was no reason for emerging markets to underperform.

Good contrarians fight the consensus but not the fundamental facts. The co4ntrarian call in emerging markets was to avoid large-cap and BRIC countries, focusing on smaller companies and smaller markets.

In January, to the surprise of many, the only equity setback was in emerging markets. Given the historic directional correlation of January returns in the US with annual returns, this is something of a relief. In emerging markets, therefore, we believe the short-term setback represents a buying opportunity.

Bryan Collings

Lead manager of the HEXAM Global Emerging Markets fund

Money has moved out of emerging markets in recent weeks, upwards of $13bn by many estimates, due to inflationary fears. These fears have driven markets such as China, Brazil and India down by more than 10% over a four-month period. But we believe the current EM inflation argument is a bandwagon issue.

No economy can enjoy persistent growth without rising inflation. The question is rather about the control, and we do not believe inflation will get out of hand. Food price inflation, which cannot be easily controlled by policy action, is the largest contributor to recent pressures, with core inflation remaining rather subdued.

The developed versus emerging market debate is ongoing and the outflows could continue in the near term, but certainly not at the same pace. It is a too often used cliché in the investment world, but we are using this volatility as a buying opportunity. We have been buying and remain bullish on the prospects for our four key overweight markets on a 12-month view – China, Brazil, Russia and Turkey.