Emerging markets are making a comeback following a bumpy ride in 2013 and at the beginning of this year, as investors search for new shoots of growth.
Corporate earnings in the developed world have been fairly solid, but the story has been one of cost-cutting rather than revenue growth.
Developed markets have performed reasonably well in 2014 – not as strongly as last year but good enough to provide hope that companies will eventually begin to increase revenue streams.
Last week on Wall Street, the S&P 500 closed above 2000 for the first time, and it has added 8.4 per cent for the year. Locally, the S&P/ASX200 has added 5.1 per cent in the year to date, but corporate earnings season, which was acceptable, did not get rewarded by investors. The ASX200 slipped 0.1 per cent during August.
Investors in the developed markets will need a bit more convincing to take shares through their current valuations, which are looking a little stretched.
Instead, investors are once again turning their attention to emerging markets, as volatility lowers following last year's sell-off.
"Emerging markets had a bit of a rough time last year on the back of improving developed markets, decreased risked within Europe and the US recovery," Wingate Asset Management chief investment officer Chad Padowitz said.
Following the US Federal Reserve's announcement and subsequent move to tapering its massive $US80 billion per month stimulus program, markets panicked and money began to quickly flow out of emerging markets and back into developed ones.
Investors have now, seemingly, calmed to the idea of tapering and are now focusing on the fundamentals of individual markets to determine their value.
"I think money flowed to developed markets as the growth rates in emerging markets were slowing. Potentially that gap opened up a bit wide. You had valuations in core-Europe, UK, US significantly higher than emerging markets and I think to some extent some of that is moving back again," Mr Padowitz said.
The MSCI emerging markets index has lifted 8.5 per cent in 2014, with strong performances from India's National Stock Exchange, up more than 26 per cent to date, Brazil's Sao Paulo Stock Exchange jumping 20 per cent and Turkey's Borsa Istanbul rising more than 18 per cent.
India has been helped by the election of a more investor friendly government and Brazil, with an upcoming election, is looking to focus more on the, as yet, unmet potential of its economy.
"Volatility is low. What's partially keeping that low is a very low transparent yield environment and reasonably decent earnings outcomes in the corporate sector. The combination of those two things doesn't lead to much uncertainty or concern," Mr Padowitz said.
China's property sector is an ongoing risk and it will be sitting in the back of investors' minds until it is resolved, which Mr Padowitz said is unlikely to happen smoothly.
Growth in Asia seems to have picked up in recent months, Capital Economics chief emerging markets economist Neil Shearing said.
"Admittedly, July's activity data from China were soft, which could reignite fears of another slowdown in the region's largest economy. But we think that concerns about a hard landing are generally overdone. Policymakers have plenty of tools at their disposal to shore up growth in the short term," Mr Shearing said.
Indonesia and the Philippines, whose respective sharemarkets have surged more than 21 per cent and 20 per cent this year, have been gather significant momentum in the last few months, Mr Shearing said.
Although emerging market equities have outperformed their developed counterparts in 2014, Capital Markets chief markets economist John Higgins said there is still room for them to continue to lead growth over the next few years.
"On average, their valuations are still more favourable. And we are fairly sanguine about the risks from slower economic growth and tighter monetary policy in the US, given that most of the slowdown in emerging markets has probably already happened and emerging market equities performed well during the past two periods of US monetary tightening," Mr Higgins said.
