The economic momentum is all with emerging markets. Their economies are growing, in many cases, at a blistering pace. Their government finances look healthy and their companies are beneficiaries of booming infrastructure and consumer development. The trouble is, everyone knows that.
Is it possible that developed markets will, in fact, prove the place to invest in 2011?
There are certainly plenty of naysayers for emerging markets. This article on Citywire asks whether 2011 will finally see the emerging markets 'party' come to an end, citing monetary Chinese tightening and investor boredom as potential drags on the sector.
The debate on whether China is in a bubble and risks a subsequent bust has been well-discussed on this and other sites. (see: The Chinese Economy: Hart break as bubble looks set to burst)
The Daily Telegraph highlights another area of emerging markets that might be in trouble - emerging market bonds. The clamour for yield has seen huge flows into emerging market bond funds in 2010. Financial experts, up to and including those at the Bank of England, fear a crash could be imminent.
In the meantime, growth in the UK continues to surprise. GDP numbers have consistently come in ahead of expectations. A number of fund managers have even suggested that some countries within Northern Europe, plus Canada and Australia are positively booming. If President Obama's tax cuts have the desired effect, they should provide a welcome boost to the US economy in 2011. The Eurozone economy, for its part, is unlikely to get significantly worse. Developed markets have something to recommend them as a contrarian bet.
However, before diving back into the warmth and comfort of home markets, it should be said that the stock market is not the economy. As such, it is worth considering the relative performance of stock markets in 2010. The FTSE 100 has during the year outperformed the FTSE Xinhua and Hang Seng indices. The FTSE Eurofirst is also ahead of the two Asian indices. The idea that developed markets are now on bargain basement valuations following an inexorable rise in emerging market equities does not hold water.
Mike Kerley, manager of the Henderson Far East Income trust, says: "Equity valuations across Asia look pretty compelling and we believe Eastern markets will outperform those in the West over the coming six to nine months on both an…
