You just need to look at the comparative returns to see why this issue has grabbed the headlines.
Having been the wunderkind of stock markets over the last decade, the MSCI Emerging Markets index has fallen from grace, picking up just 2.21 per cent over three years while the S&P 500 has returned 60.81 per cent and the FTSE All Share 42.6 per cent.
Performances of indices over 3yrs
Source: FE Analytics
The big question is whether that is the bottom of the curve or can we expect emerging markets to keep falling short of developed economies? The point is that if you buy into emerging markets now, are they on their way back up or would they decrease in value by another 20 per cent overnight?
Like with any asset class, sector or region, there is both a bull and bear argument for the emerging markets and though it is a telling figure, three years is not enough for a long-term assessment of equity performance.
Emerging market bulls say that there is obvious growth potential from the developing world as its populations become wealthier, especially as the valuations of companies in those regions are now very compelling.
However, the bear case for investing in the emerging markets is equally as strong, as Andy Merricks – head of investments at Skerritts – points out.
"Yes, there are good long-term opportunities from emerging markets, but if you are taking a long-term view then I think you would be mad to buy emerging markets now because the short-term risks are very high," he said.
"You would be better off being a bit patient and waiting for a better entry point," he added.
Merricks says that the risk is always in what price you pay for an asset and though something may seem cheap, it can always become cheaper.
Some of the short-term risks facing emerging markets include the economic slowdown in China, falling commodity prices and a stronger US dollar. The talk of QE tapering has also caused the markets to wobble, with both emerging market equities and debt seeing huge outflows in recent months.
However, Merricks says there are other headwinds aside from the heavily documented ones mentioned above.
"Everyone talks about the opportunities of emerging market demographics and their growing middle classes, but one of the risks which is underestimated by the majority is the notion that this is all going to happen in a straight line upwards," he explained.
"They are underestimating the political risks, which have been flagged up by events recently in Turkey and Brazil. This social unrest is a good flag for political risks, as these nations have previously been through boom years but are still not happy."
"A lot of the time these governments haven’t done much wrong, but as soon as there is bad news or a rise in interest rates there is a big reaction. There could be a crisis on the back of weakening commodity prices: the currencies could weaken and interest rates could soar."
"That’s where the political risk could come in, as governments panic and they put restrictions on foreign money being pulled out. It has happened before, like with the tequila crisis in 1994 and the Asian crisis in 1997."
"These markets are nothing like as liquid as they are here. It is a bit like an earthquake, you get pre-quake tremors which should be seen as a warning. I think things will get worse before they get better and that certainly isn’t a very positive outlook for the developing world. Like with anything in the current financial environment, sentiment is most likely going to drive prices instead of fundamentals over the short-run."
However, assuming there isn’t a full-blown catastrophe like the one Merricks alludes to, then there is the argument that negative sentiment can only go so far.
Andy Parsons, head of investment research at The Share Centre, rightly points out that trying to time the market is a mug’s game.
He says that it is quite easy to write off the emerging markets in their current state, but that investors cannot ignore their sheer economic potential and so he thinks drip-feeding is the best option. "Emerging markets have had a really rough time and were unsettled before, but are even more unsettled because of the Fed’s planned tapering," Parsons said.
"However, we are coming to the point, which always happens, that there is becoming a very compelling argument to invest again. You can never time the bottom of the market, but tapering is beginning to be priced in."
"Nobody knows if equity prices will fall further from here, but valuations are really attractive; therefore there has to be a point where the market thinks this has gone too far – but unfortunately no-one knows when that will be."
Parsons says that current low valuations are reaching a trough point and that although investors should not expect an immediate turnaround in sentiment, this will happen at some stage in the future.
"Emerging markets have always been the highest-risk plays, but I personally think that the greatest losses have already been made and we are now a very long way down the curve. There will be volatility in the short-term, like over the next six or nine months."
"However, the longer term opportunities are still intact," he added.
Although the general consensus on the sector seems to be that more volatility is guaranteed, more speculative investors may want to consider the recommendation of Kilik & Co’s Gordon Smith that using investment trusts could prove very fruitful.
Most of these trusts, such as Genesis Emerging Market, are now trading on much wider discounts than they have done in the past. The beauty of it is that if sentiment turned more positive then not only will the underlying assets of the trust perform well, but that discount should narrow, creating a double-whammy boost.
Alternatively, if you were to use an open-ended structure, then as Parsons says, you would probably be better off drip-feeding the money in.
Drip-feeding capital offers the benefits of pound/cost averaging, whereby you are buying more units when markets fall and less when the fund appreciates in value.
The reason why this may be the best bet over the short-term is because, as the last few months have shown, even the top-rated emerging markets funds have lost money.
