Are Emerging Markets Finally Poised for a Rebound?

NEW YORK (The Street) --- Emerging markets are poised for a better year in 2014 after lackluster 12 months, but fund managers warn against playing one market too heavily. In other words, diversify among a variety of markets and regions.

The MSCI Emerging Markets Index posted a mere 5% gain last year whereas the S&P 500  post a gargantuan 26% advance and Japan's Nikkei posted a rather astounding 52% gain. Fund managers point to increasing diversion between emerging market economies: several carry high debt levels while others are have companies with lean cost structures expected to benefit from stronger earnings growth.

Among the most vulnerable to volatility are emerging markets dependent on developed economies to fund their current account deficits. These include the so-called Fragile Five: Indonesia, India, Turkey and Brazil, South Africa. On the flipside, a cut to bond purchases by the Federal Reserve in December may reduce near-term uncertainty for these markets as the Fed engineers its 'taper timing.' 

Goldman Sachs analysts suggest greater certainty around Fed bond buying intentions will see investors focus on emerging market fundamentals - but note, bouts of pressure from periodic US rate rises.

Henderson Global Investors head of global equities Matthew Beesley said that despite Fed tapering, ongoing stimulus from economies such as Japan would giving a further boost to emerging market equities.

But he warns of a broader shift. "We've been through 10 years where growth was driven by emerging markets expansion and lower cost of production - now developed market growth is accelerating from a low base and emerging market growth is decelerating from a high base," the London-based Beesely said in a phone interview.

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