Caution remains the watchword for investors in emerging markets

EMERGING markets (EM) have been languishing under a cloud over the past 3-4 years, weighed down by growth concerns. It seems those concerns remain uppermost in investors' minds as 2014 draws to a close. Investors are typically urged to invest when sentiment is poor. At this time, however, piling into emerging markets may well be premature, even though the underperfor- mance has been sharp.

Over the past three years, based on MSCI indices, the emerging markets have been in the red, with returns at minus 3.38 per cent on an annualised basis. In this period, the MSCI world index generated 14.22 per cent a year, led by the United States. The US alone returned 14.54 per cent a year over the past three years. No one disputes the attractiveness of emerging market valuations: they are trading at a discount of nearly 30 per cent against developed markets. Yet strategists are still calling for an overweight on North American assets.

There are a number of reasons for the poor prognosis. One is that global growth remains anaemic; the International Monetary Fund (IMF) recently cut its growth forecast for 2015 from 4 per cent to 3.8 per cent. Consensus forecasts compiled by Bloomberg show that growth expectations for the emerging markets in particular have been revised downwards. The only growth engine so far is the US - an expected expansion of 3.1 per cent in 2015 compared to 2.2 per cent in 2013, based on IMF forecasts. But that is hardly enough to shore up emerging countries' exports, with Europe and Japan still in the doldrums.