EMERGING markets are back. The stockmarkets of developing countries have flipped in and out of fashion over the past 20 years as investors have switched from naive enthusiasm about their long-term growth prospects to heightened concern about their riskiness. This year they are once again in style, having generated a return of more than 13%.

That is an abrupt change of mood from 2010-14, when the markets were about as popular as a drug tester at a Russian athletics event (see chart). During those years, investors seemed to focus entirely on the negatives. The growth rates of many emerging economies, even China, seemed to falter. Commodity producers were hit by a decline in raw-materials prices. Political worries resurfaced about previously popular investment destinations, such as Brazil and Turkey.

Eventually, however, markets tend to fall far enough that they reflect all the bad news. Robeco, a Dutch fund-management group, reckons that emerging markets trade at a 30% discount to rich-world equities, in terms of their prospective price-earnings ratio (the next year’s profits, relative to the share price).

And there...Continue reading