Emerging markets a safer place for your money now

The outperformance by emerging market shares over the last few years reflects a step change in their underlying fundamentals that investors should not ignore, according to the research team at Barclays Capital.

Piero Ghezzi, head of economics and emerging markets research at Barclays Capital, said 'we think there is room for further market outperformance by emerging markets, reflecting continued economic outperformance.’

Talking to journalists as the team presented their quarterly global outlook, Ghezzi said the difference in the post-recession performance of the world's economies this time compared to the last time around has been the 'differentiation between emerging markets and the developed economies.'

And while the whole asset class was  tarnished by its slow bounce-back from the previous downturn Ghezzi believes it is clear the attraction for investors has changed.

'Last-time around the emerging economies were forced to tighten monetary policy to restore credibility and that exacerbated their pain but this time around the emerging markets have fared better than the developed countries because they have not had the same balance sheet problems,' he said.

All of which means that while Barclays Capital has downgraded its growth outlook for the US and the UK for next year, it has lifted its growth forecasts for emerging markets, lifting its growth forecast for Asia (excluding China) by 1.1% to 8% for 2010 and 0.4% to 6.2% for 2011.

For Latin America, the  investment bank has lifted its growth forecasts by 0.7% to 6.2% in 2010 and by 0.3% to 4.3% the following year.

But Ghezzi said investors looking to take advantage of emerging markets' outperformance need to differentiate between what he calls 'advanced emerging economies' such as Turkey and the Czech republic and other emerging economies such as Venezuela. Ghezzi said the former benefit from a reassuring level of transparency which means investors 'don't have to be there on the ground', but this is not true for some of the less advanced emerging economies.

And Ghezzi said it is clear that the recent outperformance has led to a step change in the way investors view the emerging markets.

He said 'Uncertainty about political risks and the reliance on the IMF have become less important' and investors now focus 'on the traditional drivers like growth' which he said has led to 'significant inflows of (investor money) which is going to continue.'