Investors in emerging-market equities suffered volatile conditions in 2011. Negative flows were driven by an anticipated slowdown in growth due to monetary policy tightening, weaker export demand, and anxious investors in an uncertain market. 

“Despite stronger growth in emerging markets, risk aversion by investors has negatively affected flows. The region remains vulnerable to concerns in the advanced economies. As such, it’s likely to continue to be a bumpy ride, at least until there is more certainty of a resolution to the debt issues in the Eurozone,” stated Simone Gavin, analyst at S&P Fund Services. 

Prospects for emerging-market economies therefore remain uncertain, although growth is expected to remain fairly robust, with weaker external demand offset by relatively solid domestic demand. Investing in emerging markets exposes investors to some of the strongest growing regions in the world from Asia to Latin America. However, it also exposes investors to an equities market that is volatile, with a relatively high risk of capital loss over the short to medium term. For this reason, we suggest an investment period of at least five years. 

Since our last emerging-markets review in 2010, there have been changes to several strategies, mainly relating to teams and processes. In this report, we detail the key findings of the 2011 sector review and explore some of the emerging themes, including FUM and capacity, diversification and positioning, and how managers deal with the many risks in the sector.

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