Time to buy up?

Meanwhile, yields on government and corporate bonds are so low that equity dividends in many cases are offering more income than bond coupons. Dr Oliver Plein at DWS Investments points out that nearly one-third of S&P 500 companies now pay a dividend that yields more than the interest on their intermediate bonds - meaning that equity investors have the benefit of potential price appreciation, dividend growth and greater income than bondholders.

While there is widespread consensus that equities are attractively priced, analysts and investors are divided over whether the value lies with developed or developing equities.

Mr Bolton's view is that investors should be increasing their exposure to developing markets and particularly Asia, where growth prospects are more attractive. Plamen Monovski, chief investment officer at Rennaissance Fund Managers, favours emerging European markets. "Emerging Europe remains the least leveraged part of the global investment universe on a government, company and personal level. While there is a significant cyclical component to that stability - related to the level of oil and commodities - the governments in the region are better prepared than in 2008 and have better fiscal and monetary flexibility," he says.

Another manager boosting his exposure to emerging markets is David Coombs, head of multi-asset investments at Rathbone Unit Trust Management. He says valuations for emerging markets look compelling for the first time in nearly a year.

Currently, 20 per cent of the Rathbone Enhanced Growth Fund is held in emerging markets, but plans are to raise this allocation to 25 per cent over the coming days.

The Rathbone fund (see table below) is just one of the many funds increasing their exposure to emerging markets. For investors who want to do the same, advisers suggest Templeton Emerging Markets investment trust which is on a high discount of around 8 per cent or Advance Developing Markets on a discount of around 9 per cent. Open-ended fund favourites include Aberdeen Emerging Markets and First State Global Emerging Market Leaders, both liked for their more conservative investment approach.

Fidelity China Special Situations fund has now fallen around 35 per cent from its peak, which was in November last year, and is well below its issue price (100p) at around 80p. It is on a discount of 8 per cent, which is far more attractive than the high premium it had been trading on since its launch.

Emerging Market Investment Trusts on discount

Source: Winterflood Securities. Data as at 12 August 2011

There are certainly bargains to be found in the emerging market funds space, but is this really where the best opportunities lie? Yes, these markets have greater growth potential than the developed economies, and markedly less public and personal debt. But their fortunes are still very much tied to those of the developed markets, especially the US. The recent falls in the sector on the back of turmoil in the US are testament of just how knitted together markets are, and analysts say it's "wishful thinking" that there is genuine decoupling occurring.

Many argue that the best opportunity for UK investors is right on their own doorstep. "While emerging markets have fallen, investors should look carefully at where the best value lies. The UK FTSE 100 index is cheap. The PE ratio is 8.5 times, while the yield is 3.7 per cent. By comparison, the yield on 10-year gilts is about 2.7 per cent, and on 30-year about 4 per cent," says Tim Cockerill, investment funds expert. "Dividend cover is high and corporates are in good shape, having reduced debt, and have become more efficient and profitable after the credit crisis in 2008. On all these counts, now should be a good time to invest, and if you're investing for five to 10 years then history tells us that buying when valuations are cheap leads to the best returns."

For those looking to up their exposure to developed equity markets and the UK in particular, Patrick Connolly of wealth managers AWD Chase de Vere suggests a UK tracker fund such as the L&G UK Index, which gives investors exposure to the FTSE All-Share in one transaction. Other funds which he thinks should benefit if markets bounce back include Richard Buxton's Schroder UK Alpha Plus, which takes a growth-orientated approach, BlackRock European Dynamic given that European stocks are particularly unloved right now, and Neptune Global Equity, run by 'star manager' Robin Geffen, which should benefit from stock market rises generally.

Source: Investors Chronicle Funds Data, Schroders, *Morningstar

Performance figures as at 12 August 2011.