Investors moving back into emerging markets need to be wary

Investors who are moving back into emerging markets after the downturn need to be wary of the “explosive nature” of the funds that focus on risky areas, according a Morningstar emerging markets wrap up.

Emerging market investment strategies are getting increasing attention from investors who are rediscovering their risk appetites after the falls from 2007-09. However, investors need to be wary of the risks of government intervention and underdeveloped legal systems, the report said.

“[Emerging markets] funds are extremely risky and prone to sharp declines in less favourable environments. [They] have easily been among the most volatile offerings over the past decade,” the report said.

Investors who want more emerging markets exposure should make sure they fully understand the explosive nature of the funds that focus on these riskier areas, the report said.

Investors should also be wary as they may have more of an exposure to emerging markets than they realise. Many international share funds already have some exposure to emerging markets, while many global corporates keep a set exposure to the developing world as a key part of their business, according to the report.

Investors should also resist the impulse to focus on single-country funds, and should take a diversified approach to emerging markets investing, the report added.