Yuri Bender: Our aim today is to achieve some sort of consensus on emerging markets investing:

• Are these opportunities suitable for all private clients?
• Should they be at the core of their portfolios?
• What is a suitable type of allocation?
• How do we select the correct managers?
• Is there a big difference in quality between the funds being launched?

Yuri Bender: It appears to be perceived wisdom these days that emerging markets should be very much at the core of private-client portfolios rather than the satellite bets of old. Bill O’Neill, how do you expect this story to play out, pitching emerging against developed markets?

Bill O’Neill: The touchstone of developments on the emerging-markets side, until recently, was the development of the Chinese economy, which suggests at this stage the market is overheating. Where China goes economically will, rightly or wrongly, have a significant effect on where emerging markets go in the next year. The argument is that the Chinese economy is expanding above its productive potential. It will be interesting to see, once the currency adjustment comes through, what the impact of that is on the emerging-market bloc overall, and the extent to which basic bank lending is restricted from here.

However, the argument at the moment, certainly in terms of emerging markets broadly speaking, is, ‘Where do you want to set the allocation?’ The MSCI All Countries World Index (ACWI) is currently 11-12 per cent of total global equities. Do investors feel happy with that as a reference point for overweight?

Broadly speaking, the current thinking is that there is a risk premium on these assets. Looking at valuations relative to developed markets, they are somewhat ahead in terms of PE ratio versus where they would have been as an average of the past 20 years. The pessimists would say, “There is a reason for this sector being on a discount”, this reason being higher volatility, which suggests the quality of earnings is less and, therefore, the multiple applied should be lower.

That fails to grapple with the idea that, ultimately, for the foreseeable future, the emerging market bloc will be the engine of growth in the world in an environment where control over inflation is a key prerequisite. However, if it is seen to have control over inflation and there is a situation where, as a result of that and other technological developments, productivity continues to be enhanced in these economies, and labour and resources are used more sensibly, why should that share of total equity not expand?

There is, then, that idea of volatility combined with the convergence view that stock markets for this bloc, as a share of GDP or by using the various metrics, are ‘under capitalised’ in terms of equity and, consequently, they should expand. That is the convergence theme relative to, say, the position of the US economy. However, there is a sense that the volatility issue has been put to one side, simply because of the amount of liquidity that has been surging through the economy.. At the same time, however, there is a sense that the volatility issue has been put to one side, simply because of the amount of liquidity that has been surging through the economy, certainly since the onset of the financial crisis.

Jeremy Beckwith: If you look at the three key elements of portfolio theory - returns, risk and correlations, then a higher weight of emerging markets makes strategic sense from a portfolio construction perspective. The returns in emerging markets are likely to be higher than in developed markets. The risks from emerging markets are coming down as countries become more developed and increasingly, we are seeing the correlations beginning to diverge, because many of these countries are now going down different paths and specialising in different parts of the economic value chain.

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