30 Jun, 2014, 1107 hrs IST. Sanket Dhanorkar. ET Bureau

If you are well invested in Indian stocks and want to diversify your portfolio, emerging market funds could throw up opportunities.

The spotlight is back on the emerging economies after almost a year. For a while now, developed nations, particularly the US and European countries, were the favourite destinations for investors worldwide. The US S&P 500, for instance, had touched new life-time highs. Last year, as the economic conditions of developing nations went through a rather challenging phase and recovery in the developed nations picked up, investors had made a beeline for the more stable developed markets.

But, over the past few months, stock markets of emerging countries have witnessed a sudden spurt in growth, with their benchmark indices touching new highs. And, to take advantage of this growth story, fund managers and equity investors are putting their money back in emerging markets. JP Morgan Mutual Fund. for example, has launched a new fund — Emerging Markets Opportunities Equity Offshore Fund — to provide investors an opportunity to participate in the recovery process and earn decent returns.

There are several other funds which are already present in these markets and are expected to do well. But, is there a compelling case for investing in these emerging markets?

Turnaround in sight

In June 2013, investors had fled the emerging markets in anticipation of the negative impact they would have following the US Federal Reserve tapering its stimulative quantitative easing policy. According to the Institute of International Finance, investors pulled out $32.5 billion from stocks and bonds of 30 emerging markets in June 2013, at the peak of the financial upheaval.

The impact of this sudden outflow wreaked havoc on the emerging markets. Currencies of most of these countries, including India, went into a tailspin and the stock markets took a beating. Central banks of all developing nations took steps to improve investor confidence, with Brazil, India, South Africa and Turkey, raising domestic interest rates to stem the outflow of dollars and by introducing some tough economic measures.

Now, the flows have reversed considerably. Over the past 11 months, investors have pumped in $221.7 billion into emerging market assets, including an estimated $45 billion in May 2014 alone. Last year, developed markets rose 19.4% against a 5% loss for the emerging markets. However, the MSCI Emerging Markets stock index, which plunged 15% in late May 2013, has since recovered considerably.

So, is the tide turning in favour of emerging markets again? Some experts believe this segment is in for a turnaround. Says Noriko Kuroki, JP Morgan Asset Management, client portfolio manager, global emerging markets team (Singapore): Emerging markets had been out of favour, as their growth decelerated and earnings struggled. However, in a world of globalisation, we believe that these markets will eventually recoup all their losses and lead to the long-awaited earnings recovery.

It is encouraging that there are some signs of an economic recovery s unfolding in these economies, albeit gradually. Adds Gopal Agrawal, CIO, Mirae Asset Global Investments (India): Emerging markets are at the bottom of the growth cycle. Things are likely to improve from here on the back of expected revival in growth globally.

Why invest in other emerging markets?

As a resident of a dynamic and growing emerging market like India, what more can one expect by investing in other emerging markets? While the Indian stock market provides ample opportunities for investors to get high returns on stock investments, these returns are not likely to be consistent. The domestic economy will go through ups and downs, giving high returns for a few years and going downhill at other times. This is where several other emerging nations could provide unique opportunities — ones that may not be available to investors participating only in the Indian market. They will also allow diversification of your equity portfolio.

Besides the vibrant economies, including Brazil and China, there are several smaller countries, such as Turkey, Indonesia, South Africa and Philippines, which are likely to clock high growth rates. This obviously throws up opportunities for investors. Some of these countries are also home to some high profile corporate giants that are not listed on Indian bourses, and, therefore, throws up an opportunity for Indian investors to take advantage of their growth. In other words, investing in other emerging markets offers investors a chance to profit from the fast-growing economies as well. Despite the current problems, the general consensus is that emerging markets will grow more rapidly than the developed countries.

According to the International Monetary Fund’s April 2014 forecast, advanced markets — a group that includes the US, Japan and most European countries — are expected to generate gross domestic product (GDP) growth of 2.2% and 2.3% in 2014 and 2015, respectively, far lower than emerging economies’ growth forecast of 4.9 % and 5.3%, respectively. Current valuations make the most compelling case for investing in this basket, say experts.

With developed market stocks getting more expensive, emerging market stocks offer better value. The US S&P 500 index, for instance, is trading at four-year highs, while most emerging markets are now trading at a significant discount to their long-term averages, offering potential for a decent upside. Emerging markets are now attractively priced both in relative to their own history as well as against developed markets, offering a very attractive entry point for investors in India, says Kuroki.