Sentiment towards the regions had hit extremely low levels at the start of the year and retail investors had pulled huge amounts of their money out.
However, our data shows that the developed world indices have struggled to make further headway this year while the emerging markets and Asia Pacific regions are both in positive territory.
Performance of indices in 2014
Source: FE Analytics
The FTSE All Share is down 1.3 per cent for the year and the S&P 500 1.58 per cent while the MSCI Europe index is flat.
However, the MSCI Emerging Markets index is up 0.36 per cent while the MSCI AC Asia Pacific index has made 2.25 per cent.
Managers and analysts have argued for some time that low valuations in the emerging markets would lead to a rebound at some point.
Monica Tepes, investment trust analyst at Cantor Fitzgerald, told FE Trustnet in August that the sector’s valuations were at 2008-style lows.
Our data shows that on a fund-specific level the outperformance is even starker.
The top-performing emerging market fund since the beginning of March is Aberdeen Global Emerging Markets Equity, which is up 8.18 per cent; Aberdeen Emerging Markets Equity is up 8.1 per cent in a return to form for the fund house which struggled last year.
However, in the IMA UK All Companies sector the top-performing fund – FP Matterley Equity – has lost 1.18 per cent. R&M UK Equity Unconstrained is down 1.55 per cent and Standard Life UK Equity High Alpha 1.58 per cent.
Only two funds in the IMA Global Emerging Markets sector have lost money while the two worst-performing in the UK sector have lost more than 10 per cent.
Analysis by JPM suggests that emerging market equities are likely to produce double digit returns over the next 12 months given their low valuations, based on a regression analysis of past valuations and returns.
Richard Titherington, manager of the JPM Emerging Markets Income fund, said: “There are always unforeseen risks in emerging markets and it is an asset class driven more by sentiment and confidence than others.”
“After the strong performance of developed market equities in 2013, emerging market equities currently trade at the largest discount to developed market equities in nearly 10 years.”
“At the moment, buying EM is neither obvious nor popular – but buy before it is obvious, because the obvious thing is almost always wrong,” he added. “History suggests fortune favours the bold.”
FE data also suggests that we could be seeing the end of another major theme of the past couple of years: the outperformance of the FTSE 250.
While the latter is still marginally ahead year to date the gap has been narrowing following the market correction since the end of February.
Performance of indices in 2014
Source: FE Analytics
Since the start of March the FTSE 250 is down 5.77 per cent to the 2.77 per cent of the FTSE 100.
Performance of indices since 1 March
Source: FE Analytics
Many managers have been shifting their portfolios into large caps since the start of the year thanks to concerns over valuations in the mid caps.
FE Alpha Manager Alex Wright told FE Trustnet in December that valuations were stretched in the small and mid cap space.
FE Alpha Manager Toby Ricketts also warned on valuations in the mid-caps, saying they were in bubble territory.
However, the FTSE 250 has continued to outperform until the recent sell-off.
Data from small ad mid cap broker Liberum shows that the valuations on the FTSE 250 are at 15.7 times earnings falling to 14 times in 2015, while the FTSE 100 is trading on 13.3 times falling to 12.2 times next year.
The FTSE 250 is above its 10 year historical P/E, the broker notes, although is better value than it was during the majority of 2000 to 2007.
On a fund specific level the mid-cap focused funds have all underperformed since the start of March, falling into the third or fourth quartiles.
However, the top performers include a number of multi cap portfolios, and there is no sign of those tilted towards the large caps starting to outperform just yet.
However, the underperformance of the FTSE 250 has come over a very short period and it remains to be seen if this is a longer-term trend.
