Data from FE Analytics shows that the MSCI Emerging Markets index is down 9.07 per cent over the past three years while developed world indices have soared ahead.
The developing world has continued to suffer in 2014, with the index down 4.9 per cent year-to-date.
Performance of indices over 3yrs
Source: FE Analytics
Flanders (pictured), former chief economics correspondent at the BBC, says prices have now fallen so far that a buying opportunity has opened up for the long-term investor.
“Many of our fund managers would say they are well into the 'buy zone' for investors with a long-term perspective,” Flanders said.“It's important to hold your nerve. You don't want to be part of what is fondly known as the PIPO trade – ‘panic in, panic out’. Fund managers who can jump to take advantage of this irrational behavior are very fond of them indeed.”
However, for ISA investors who have poured money into emerging markets over recent years only to see a serious chunk of their gains wiped out last month, it is a tough call whether to sell now and take a loss, if they haven’t already, or hold the course and hope for a return to growth.
Paul Warner, managing director of Minerva fund managers, thinks the pick-up could come sooner than many people expect.
“Emerging markets have done nothing for the last three years,” he said.
“On a short-term basis the bumpy ride could well continue, but they are attractive in the long-run. This is because, looking globally, the real growth will continue to proportionally come from these economies.”
“Also, from an investor's point of view, we may even be positively surprised before the end of the year with the numbers coming out of emerging markets, because expectations are so low,” he added.
Gavin Haynes, managing director of Whitechurch, says that investors should play this recovery with managers who have a strong stockpicking record rather than a benchmark-aware approach.
“Emerging markets each have their own dynamics,” he said.
“For most investors it makes sense to have a diversified exposure. If investing in this area I would be looking for funds with experienced fund managers who have strong resources across different regions.”
“The current volatility will provide good stockpicking opportunities to invest in companies that have been indiscriminately sold off.”
Warner recommends emerging markets funds that pay a dividend, because these offer investors a return from the yield while they are waiting for capital growth.
Damien Fahy, head of research at Dennehy Weller & Co, says investors should take the current situation as an opportunity to rebalance portfolios.
“Scares in emerging markets are a regular occurrence, and a healthy adjustment,” he said.
“This contrasts with markets in the developed world which have effectively been rigged in recent years by QE.”
“We know emerging markets are cheap, but can get cheaper, we just don’t know over what timescale.”
“We know that there is huge upside potential, whether we look at GDP per head, young populations or rapidly growing middle classes.”
“None of these features underpin investments into ageing and indebted developed markets.”
Fahy reminds investors of the old adage “buy when others are fearful”, which he says never fails in the longer term.
Flanders says that investors must not miss the opportunity to pick up assets when they are so cheap.
“The rule here is don't wait until you're comfortable, but do be sure you're buying cheap,” she said.
However, she also warns investors to take diversification seriously, which at this juncture means buying into the gilt market.
Anyone with a positive outlook for the global recovery throughout 2014 may be tempted to sell or avoid buying gilts in order to maximise gains.
FE Analytics data shows that they lost 4.19 per cent last year while the FTSE made 20.81 per cent.
Performance of indices in 2013
Source: FE Analytics
However, Flanders says that investors should hold on to this out of favour asset class as insurance against the unexpected.
Haynes agrees.
“Diversification is essential for a well managed portfolio,” he said.
“Given that the economic recovery still appears fragile, it makes sense to have investments in your portfolio that benefit from an improving economic environment while also holding funds that provide insurance if the economic outlook should take a turn for the worse.”
Warner disagrees, however, saying that the asset class has a poor short-term outlook.
“I am not sure I’d be buying gilts at the moment,” he said.
“I don’t believe the effects of QE have actually been felt yet and may not until 2016 when there could be a significant upturn in inflation.”
“In the shorter term they’re not a problem, but in the longer term I don’t see much point.”
