Emerging markets back in favour

The first-quarter revival in European equity markets can be linked to the European Central Bank's (ECB) determination to shore-up the eurozone's troubled banking sector, but the effects of the ECB's splurge have been felt far and wide. As investors gradually became less risk-averse, emerging markets enjoyed a notable revival - despite data suggesting that growth rates for the Asian powerhouses of China and India are slowing.

Emerging market equities were hit hard during the second half of 2011 as risk aversion grew in reaction to the eurozone debt crisis, so a sharp rebound was always likely once investors got a taste for risk again. The MSCI Emerging Market Index rose by 14 per cent during the opening three months of 2012 and this strength is reflected by the performance of specialist emerging markets funds over the past three months. A glance at the top ten performing funds in this sector over three months shows returns of 18-22 per cent. The long term performance of those funds who have a track record of three years or more also emphasises how emerging markets investing should really be viewed as a long-term game.

Recent research from Lloyds TSB Private Banking indicates that investors have become more positive about the prospects for emerging markets. Of 1,000 private investors surveyed, 17 per cent are planning to increase their exposure during the next six months, versus 5 per cent who will pare back their investments.

And a more focused approach, taken by independent research business Hardman & Co, could have been even more profitable. Hardman highlighted the top five performing Indian stocks traded on the Alternative Investment Market, which all comfortably outperformed the 12.6 per cent increase in India's benchmark Sensex index (and a similar rise in the FTSE Aim100) during the first quarter. It's interesting to note that the best performers were all established businesses rather than speculative minnows.

UK investors looking to piggy-back on the revival in emerging markets can either choose a collective investment vehicle or take on more risk through their own stock picks. But investing in emerging markets has its challenges. Even established players in these markets can stumble; witness the recent travails of PZ Cussons due to the political unrest in Nigeria. Investors should also be aware that emerging markets are likely to suffer disproportionately should the recent rally turn out to have been a mere interlude in a longer bear market.

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