Emerging market equities battered in 2011

Tighter monetary policy, weaker export demand and jittery international investors combined to make emerging markets equities one of the worst-performing asset classes in 2011, according to Standard & Poor's (S&P).

The Standard & Poor's 2011 Emerging Markets Sector Review covered 27 funds offered by 21 managers across three peer groups: global emerging markets, Asia ex-Japan, and single countries (ie, China and India funds).

"Market conditions in 2011 have been a reverse of the 2009 'risk-on' environment, and risk aversion has dominated," said S&P.

The heaviest losses in emerging market equities markets were in countries such as Brazil, China and India, according to the report.

"The region remains vulnerable to developments and concerns in the advanced economies, and will likely continue on an unpredictable path until there is more certainty of a resolution to the turmoil in developed markets," said the report.

But strong domestic demand in emerging markets will likely offset the weakening of external demand, said S&P.

There were two ratings changes in the review. The Colonial First State Global Emerging Markets Select fund was upgraded from four stars to five stars, making it the only five-star fund. The Schroder Global Emerging Markets fund was downgraded from five stars to four stars, "due to several factors that we believe could hinder performance".

The AMP Capital Asian Equity fund and the ING Global Emerging Markets Share fund remained 'on hold'.

S&P recommended that investors adopt a five-year investment horizon when considering equities markets in the growing regions of the world, since the risk of capital losses in the short to medium term is "relatively high".