This year, investors in emerging markets have faced enormous uncertainty with political unrest in Turkey, Ukraine and the Middle East, a currency devaluation and technical default in Argentina and ongoing concerns about Chinese growth. In saying this, they have done reasonably well year-to-date.

With share valuations in emerging markets looking relatively cheap compared to those in developed markets, we explore what investors need to look for before taking the plunge.

Be selective

While emerging market shares are relatively cheap, the current health and future prospects of individual countries within this segment can differ significantly. Therefore, while we expect investors will benefit from general exposure to emerging markets over the long-term, the short-term picture requires investors to be more discerning and pick and choose based on individual country and company fundamentals.

For example:

Consider debt levels

Investors in emerging markets should focus on current account surplus countries as they are less vulnerable to foreign capital flows, for example China and Korea, and therefore less susceptible to volatility when the US Federal Reserve decides to start raising interest rates again.

Final thoughts

While a recession in emerging market countries is unlikely, we are likely to see slower growth than we have witnessed over the last decade. The trend in commodity prices is softer (working against Russia and South America) and the last decade has seen some backtracking on economic reforms.

After posting solid returns since May, emerging markets have improved since the start of the year. However, emerging markets still have a lot of catching-up to do on the ground lost to developed markets since 2010. More broadly while they are cheap and still have some catching-up to do, investors do need to be more selective than was the case, say a decade ago regarding the emerging world.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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