Watch out for the rising stars in world markets

On the upward side, there may be almost unlimited growth with a

younger, more educated generation coming forward which has far more spending power than ever before.

On the downward slope, there are risks – notably political and currency instability – and often a lack of stringent accountability. There may not be the infrastructure to cope with the 21st century.

It is not a market for the risk-averse. If turbulence – such as current events in Thailand – frightens you, stick to tried and tested mature markets. Yet you will miss out on far greater growth.

Emerging markets are not something to dip your toe into to test if you like the water. They are for long-term savings, ideally ten years plus.

The sector should form part of a balanced portfolio with the proportion depending on both your attitude to risk and reason for investing, such as to pay off a mortgage or fund retirement. Following the

uncertainties of western markets over the last couple of years, many independent financial advisers have been more comfortable in recommending a greater percentage of savings go into emerging markets as they take a greater share of the global economy.

Watch the effect of inflation and consequential policy tightening in key markets, like China which shows signs of overheating. Such growing pains are normal.

The principal attractions for emerging markets are:

n growth of a middle class with their consumer spending (India and China);

n infrastructure spending (China) in the short term;

n resources (such as Africa, Latin America);

n oil, gas and energy (like Russia and Middle East);

n low cost production (Korea, eastern Europe, Vietnam).

There are four ways to enter such markets: single country, country groups (like 'BRIC', the acronym for Brazil, Russia, India and China), regionally (such as Asia or Latin America) or through global emerging market funds.

The sector's top performing unit trusts and open-ended investment companies (OEICs) over three years are Aberdeen Emerging Markets and First State Global Emerging Markets, turning 100 into 172 and 162 respectively, according to stockbroker Bestinvest.

The same firm announced its 'Dog fund' list (available to readers 020 7189 9999) which should be approached with caution. Whilst the average emerging market fund achieved 139 over three years, several grossly under-performed, notably Martin Currie 115 and Scottish Widows 133.

China is seen as the flavour of the moment but with worries that its growth – an astonishing 11.9 per cent in the first quarter – may be cut by problems in Europe. The authorities have tried to cool the economy by raising the reserves banks are required to hold as well as reigning in bank lending.

Concerns both over a property bubble and valuations in China indicate that now may not be the time to invest there. Its authorities could easily place a substantial tax on foreign investors. Yet a wall of investor money surged into China in March, mainly through the launch of Anthony Bolton's China investment trust.

The Hang Seng index is among the worst performers among leading benchmarks this year.

However, non-Chinese companies are keen to gain a quotation. Two recent listings are the first Russian firm (Rusal, the world's largest aluminium company) and first French (skincare retailer L'Occitane). They consider future growth will come from China, like Prudential's aim to purchase AIA.

Away from China, Andy Parsons of The Share Centre (0800 800 008) says he is "very comfortable with the BRIC group of countries" and tips Allianz BRIC Stars whose manager does have the flexibility to go beyond the four countries. Parsons though has accountability issues in both eastern Europe (such as Estonia and Latvia) and Cambodia and Vietnam.

For specific countries, Parsons tips both First State Greater China Growth and Invesco Perpetual Latin America, most of which is invested in Brazil.

Some funds are launched in a blaze of publicity but concerns right from the start question their logic. New Star's Heart of Africa, launched in November 2007, was just such a vehicle.

Although it intended to invest in nations rich in natural resources, the markets were too under-developed. It was wound up earlier this year.

Martin Payne of Leeds-based stockbrokers Brewin Dolphin likes several funds including First State Emerging Market Leaders, Templeton Emerging Markets, Allianz BRIC Stars and Jupiter Emerging European Opportunities.

The latter has a highly concentrated portfolio of around 35 stocks and no investment is made without meeting the management. With 550m assets, the main holdings are in Russia (60 per cent), Turkey (15 per cent) and Poland (10 per cent). Payne warns: "It must be considered high risk but complementary to a more diversified emerging markets fund."

Among investment trusts, the stars over five years on a net basis (allowing 3.5 per cent expenses), according to AIC research using Morningstar, are:

n Black Rock Latin American, up 279 per cent;

n Templeton Emerging Markets, up 249 per cent;

n JP Morgan Emerging Markets, up 189 per cent;

n Genesis Emerging Markets, up 176 per cent.

Many of these successful trusts have a high proportion of their holdings in Brazil and India. From the UK, it is also possible to invest specifically in India, the world's largest democracy, and enjoy stunning performance. Over the same period, JP Morgan Indian is up 183 per cent whilst New India rose 149 per cent.

If smaller firms among emerging markets appeal, look particularly for Aberdeen Asian Smaller Companies (up 121 and 438 per cent over five and 10 years) and Scottish Oriental Smaller Companies (showing growth of 165 and 584 per cent on the same basis).

One relatively new approach is to invest in emerging market debt.

Parsons tips Investec Emerging Markets Debt which offers a 7.13 per cent historic yield.

Its holdings are mainly in Europe excluding UK (35 per cent), Americas (23 per cent), Pacific Basin (20 per cent) and South Africa (13 per cent).

Accountant's foresight paying off

Twins Michael and Henry Putley, 14, should come to appreciate the foresight of their accountant father, Jeremy, who started saving in emerging market funds for them from the time of their birth.

Initially Jeremy invested 100 monthly and then doubled the sum which is invested via a bare trust for tax-efficiency.

Currently he invests in Templeton Emerging Markets investment trust and Jupiter India, a unit trust. The former, launched 21 years ago, is mainly in financial, energy, materials and consumer discretionary. Managed by Dr Mark Mobius from Singapore, it has its main holdings in Brazil (21.2 per cent), China (20 per cent), India (13.80 per cent) and Thailand.

The Templeton trust has seen 100 jump to over 532 in a decade. Jupiter India started in 2008 and has taken 208m split into 79 holdings.

Jeremy, 65, lives with his wife, Elena, a teacher, in Harrogate.