Investors look east for the promise of rich returns

Emerging markets have outperformed developed markets for nine out of the last ten years. Furthermore, the 2008/9 financial crisis was created in the developed market and has left newly emerging economies largely unscathed.

It is not surprising therefore that emerging markets have rebounded faster and offer superior growth prospects than debt-laden developed states.

The world economy is rebalancing from the concentrated power typified by the creation in 1976 of the G7 (the group of seven industrialised nations) with a drive to urbanisation.

Expect attractive capital growth from newly emerging states. Richard Titherington, head of the emerging markets equities team at JP Morgan, has identified four key sectors: consumer, financials, information technology and telecommunication services. However, there are strategic risks, particularly government interference and inflation.

Guidance is vital in this field. Michael Stokes of Michael Stokes Financial Planning has been recommending emerging markets for some time and particularly likes eastern Europe and Russia specifically. His top funds to gain exposure in this sector are Neptune Russia & Greater Russia, Baring Eastern Europe and JP Morgan Eastern Europe.

China is a major power among emerging markets and in June overtook Japan to become the world's second largest economy. It is growing at 9.6 per cent a year and last month had its first interest rate rise since 2007. Its economic model generates national savings at the unprecedented rate of 53 per cent and large trade surpluses as a result.

China will rebalance some of its priorities to address this position but savers here should still look to enjoy its growth.

India is also a popular choice, currently enjoying 8.5 per cent annual growth. Washington observers predict China will overtake the US by 2030-2040 and India by 2050. Among single country funds to consider is First State Indian Subcontinent, which is managed from Edinburgh by David Gait and Sashi Reddy. Its major holdings are in consumer staples, IT, materials and financials.

At the Dunfermline-based Max Horne Group, most emerging markets exposure is arranged through multi-asset portfolios, such as Frontier, but where specific funds are required, Franklin Global Emerging Markets and JP Morgan New Europe are the choices. Horne says he prefers to steer away from the 'BRIC' funds, so named as they invest in Brazil, Russia, India and China.

Yet Brazil is often tipped as one of the states to watch.Over the past 100 years, the South American powerhouse has grown at an annual average of 4.9 per cent in real terms which is considerably better than the US, which grew at 3.5 per cent over the same period. Yet Brazil remains an emerging market whilst the US is the world's leading economy.

Brazil has not emerged owing to hyper inflation, notably suffered in 1958-68 and again in 1975-94. Now it has brought inflation under control, allowing its market to return 16 per cent annually since 1995, which is twice the annual return of US equities.

A new fund, Jupiter Global Emerging Markets, could be one to watch, suggests Alistair Blyth, director of AB1 Financial Planning in Edinburgh. Launched earlier this month, the fund is being run by the highly experienced Kathryn Langridge.

Blyth also tips the emerging markets funds provided by Aberdeen, Baillie Gifford and Neptune as well as First State's Global Emerging Markets Leaders Fund which concentrates on medium to large capitalisations.

An alternative way to invest is by tracking the MSCI Emerging Markets Index which covers 23 states. An exchange traded fund is the cheapest way to do this, according to Iain Wishart of Chartered Financial Planners Wishart Wealth. He recommends the Deutsche Bank Emerging Markets ETF where the total annual cost is only 0.65 per cent.

If looking for active management, Wishart likes the Aberdeen Emerging Markets Equity Fund, which was launched in August 2001. Its largest holdings are in Brazil, China/Hong Kong, India and Mexico and has a total expense annual ratio of 2 per cent.

Wishart's recommendation for clients seeking emerging markets diversification is to split the holdings between the low cost Deutsche Bank passive fund and the Aberdeen fund.