'It is a good time for investors to consider emerging markets in equity portfolios'

De Tusch-Lec said the notion of EMs and their role within global equities was changing, as a view was building that many EM countries were more stable than they got credit for.

He added: “Globally, when it comes to valuations, the UK and EMs both look most attractive. Substantial dividends are on offer, with good growth and attractive valuations. 

“I think investors can be prejudiced about EMs, which have significantly underperformed so-called developed market equities for several years. 

“Increasingly, I am seeing large multi-national companies in EMs come onto my radar. Often we can find a well-run company in a growing EM that is as good as any in developed countries. On current valuations, and for income investors in particular, now seems a good time to consider including some in your portfolio.”

In a recently published opinion note by investment management company Nuveen, Saira Malik, chief investment officer, noted that among EM equities over the intermediate term, she saw some markets offering relatively attractive valuations, solid fundamentals, improved earnings and export-driven economies that could get a boost if the US dollar were to weaken. 

Brazil, where sharply declining inflation has prompted the central bank to cut interest rates, is one example. Mexico is also on the radar as its economy has benefited from 'near-shoring', as US companies have increasingly been moving some of their overseas business operations closer to home.  

“But even as EM corporate fundamentals and earnings growth have stayed resilient, the asset class has historically been more volatile than developed non-US markets, tending to move directionally in line with China. As for China itself, persistent weakness in its real estate sector puts a sustained economic recovery in doubt."

Malik added: “In our view, an asset class as diverse as EM is best suited to active management to generate outperformance, as passive strategies may leave investors vulnerable to China’s outsized weighting in the MSCI Emerging Markets Index and to the thorny geopolitical risks that accompany investing in Chinese assets.” 

Malik noted that after a difficult second quarter for China’s economy, some indicators, such as retail sales and industrial production, exceeded forecasts in August.

But investors remained worried about cracks in the country’s massive property sector, as real estate companies Evergrande and Country Garden teetered on default due to over-building and excessive borrowing. 

Francois De Bruin, co-manager of the Global Equity Endurance Fund at Aviva Investors, agreed that EMs were an increasingly important part of the global ecosystem, so therefore, geopolitical risks and demographics should be closely monitored. 

“However, leadership will likely emanate from the world’s largest market in the shape of the US, and EMs will be hoping the Federal Reserve can effectively subdue inflation without needing to induce too much pain on its economy and its global trading partners,” De Bruin added.

ima.jacksonobot@ft.com