The outlook for global emerging markets (GEM) equities has been over-hyped, warns Standard Life Investments, and there is not enough evidence from valuations to suggest they will outperform developed markets over the near-term.

Global Perspective, the global fund manager's outlook paper, argues in its latest edition that despite record inflows into emerging market equities in 2009, and a growing recognition of the structural drivers in many emerging economies, the near-term returns will be no better than those in developed economies.

Standard Life Investments is therefore warning investors to look out for traps they can fall into when examining GEM equities, such as the issue that country analysis does matter and that individual countries within this universe will have different futures. Some investors also argue that GEM equity valuations are justified on the basis of faster growth in these economies, despite under-performance recorded over certain time periods.

"It is certainly the case that there are important structural drivers such as an expanding middle class supporting customer spending, and more market friendly economic and monetary policies, that will support GEM equity markets going forwards," commented Andrew Milligan, head of global strategy at Standard Life Investments. "However, our analysis shows that when current valuation signals were seen in the past then near-term returns from GEM equities have been no better on balance that their developed economy counterparts. In certain circumstances, such as a double dip recession in the developed economies, their future returns could be better rather than worse."

Milligan explained that their preference for accessing these opportunities is via companies listed in the developed economic blocs since they are generally better regulated, more liquid and are on valuation discounts to their GEM peer group. "As an example, about one quarter of the profits of the UK's FTSE350 index comes from emerging markets. We currently see many opportunities in a range of sectors, for the benefit of our clients."

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