Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The year has started with a rush of interest in emerging markets, continuing a trend in place since the early days of the pandemic last year.

Figures from the Institute of International Finance, analysed and quoted in the Financial Times this week, show $17bn flowed into major emerging market bond and stock market assets in the first three weeks of 2021. That follows $180bn of inflows in the final quarter of last year and continues a recovery that has been gathering momentum since March last year.

Emerging markets, in Asia in particular, suffered at the start of the pandemic as investors fled those regions investors assumed would take the biggest early hit from Covid-19 and the lockdowns to prevent its spread. As developing economies continued to suffer lockdowns through 2020 and Asian economies saw cases fall, the return to emerging markets has gathered pace.

Also helping the trend is investor’s appetite for undervalued assets while markets in the developed world, particularly the US, have remained elevated.

The rise in flows to emerging markets has been mirrored in outperformance for those markets versus the developed world, and the FT reported a 9% rise in the MSCI EM Index in first three weeks of 2021 versus just 2.7% for its MSCI World Index counterpart.

So, should you follow the flows to the emerging world as well?

Important to say is that any refocusing of your investments should be limited to ensure your portfolio remains properly balanced. For most ordinary investors, developed markets and the large global companies within them should continue to form the bulk of holdings.

That said, some will see sense in upping exposure to less-highly valued areas of the world market.

Prospects for economic growth currently appear better in the developing world and China - the largest emerging market and so often the driver of growth in its surrounding region - is growing more quickly than the US, Europe and UK at the moment, posting 2.3% growth last year while the developed economies contracted.

Clearly the outlook from here depends in great part on countries’ ability to roll out vaccines and return their economies to something more like normal as 2021 progresses. A successful vaccination programme in the US, in particular, could see the consensus shift again if markets begin to see good progress being made there.

Emerging markets have tended to provide a more volatile ride for investors than the developed world and this needs to factored into investors’ thinking. As reported by the FT, much of the current interest in emerging markets comes from excess liquidity brought about by low interest rates and spending by first world central banks. Any change in the outlook towards a tightening of monetary policy could see volatility rise in the emerging world.

Our Select 50 list of favoured funds includes a number which focus on Asia and emerging markets, including two new additions. The Fidelity Funds - Emerging Markets Focus Fund, managed by Alex Duffy, concentrates on high quality companies in the emerging world which can demonstrate high corporate governance standards and a willingness to reward shareholders - a traditional area of risk for emerging market investors. Duffy manages the fund with the aim of giving investors less volatility than in the wider market.

The Principal Finisterre Unconstrained Emerging Markets Fixed Income Fund is a bond fund with a mandate to go anywhere in the EM debt universe. Our analysts like the fund as a potential partner to developed market bond holdings.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The Fidelity Emerging Markets Focus Fund and Principal Finisterre Fund may use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Currency hedging is also used to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful. Hedging also has the effect of limiting the potential for currency gains to be made. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered:

Active investing; Asia & Emerging Markets

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