What’s next for emerging markets?

Emerging markets trade on “attractive” valuations, as Russell Investments notes. They are collectively on a forward price/earnings ratio of 11 and at the biggest price-to-book discount to developed markets in ten years. But “the cycle… keeps us cautious”.

China is slowing; commodity prices are falling; and the US dollar is rising. The prospect of higher US interest rates draws capital away from traditionally risky assets such as emerging markets.

Note too, says Gillian Tett in the FT, that many emerging-market firms have borrowed in dollars but are servicing the debt in local currencies.

So it’s not surprising that HSBC expects emerging-market growth in 2015 to fall from this year’s 4.2% while the developed world gathers momentum.

With the US continuing to lead the charge, the best bets in emerging markets may be the countries most closely linked to it, says Lex in the FT. Mexico is highly geared to its neighbour. South Korean exporters, notably car and electronics firms, will profit from a revitalised US consumer.

Meanwhile, we think that markets with large domestic economies that can offset external weakness, such as Indonesia and the Philippines, should keep doing well.

Indian growth is on track to step up a gear thanks to government reforms, as Morgan Stanley notes, and embattled Brazil is still cheap enough to justify a long-term investment.