The prospect of tapering by the Federal Reserve Bank is likely to create more opportunities to buy into areas such as China and India, say investment experts.

The prospect of tapering by the Federal Reserve Bank is likely to create more opportunities to buy into areas such as China and India, say investment experts. Photo: Bloomberg

Professional investors are no longer bracing for further volatility in emerging markets - many are hoping for it.

The prospect of tapering by the world’s biggest central bank is likely to create more opportunities to buy into high-growth parts of areas such as China and India, according to a growing number of investment experts.

“Asia remains a value asset and while an end to volatility-supressing central bank policy will take some absorbing, fundamentals have improved significantly over the past three quarters,” said Asia Pacific investment bank CIMB analyst Jason Todd said in a note to investors. He added that he expects Asian equities to return a combined 19 per cent in the 2014 financial year.

“We favour markets which will benefit from improving growth and offer good value - China and Korea. We like the structural story behind India, the Philippines and Vietnam," he said. "However, we think Thailand has run too hard and tactically. We are defensive on Indonesia.”

Last month, billionaire and international equity manager Kerr Neilson, of Platinum International, said he was investing more in emerging markets in the belief that the real opportunities lie in economies like China and India.

Head of fixed income at Threadneedle, Jim Cielinski, said the growth outlook for emerging markets continues to be challenged, but earnings estimates have been falling, making valuations start to look more attractive than those in developed markets.

“The valuation now is starting to look interesting and as global economic growth picks up, I would expect that the pace of earnings downgrades and lower economic growth expectations which we have seen in emerging markets, will start to ameliorate," he said.

"It may well be that the modest performance that we have seen in emerging market equities over the first half of this year ... might actually come to be a bit more sustained.”

There have been concerns bubbling away about a US-led sell-off in the region as the Federal Reserve ends its stimulus program later this year, and moves closer to raising interest rates. However some believe a significant correction is unlikely and if it does happen, would be short-lived.

“If rates are the catalyst for a market correction, then we are buyers into weakness. Similarly, the threat of rotation is overdone," Mr Todd said. "South-east Asia is not overvalued like in early 2013, even if external vulnerabilities remain.”

Growth in Asia is likely to be a good thing for Australia, but on the flipside, another severe financial crisis would be extremely harmful to commodity exporting countries to that region and their domestic asset prices.

Australia’s exposure to Asian emerging economies is the largest, as a proportion of its GDP, of any of the advanced economies, according to an annual report by the Bank for International Settlements.

When the Fed first signalled to financial markets that it intended to start tapering its $US85 billion a month bond buying program in May last year, there was a massive rush of capital leaving emerging market equities and currencies.

Key factors that are now seen to be supportive of further growth in the region compared to developed market equities include lower relative corporate debt and 11 times forward earnings.

“Asian corporates are not highly geared and remain cushioned against rising rates. In addition, they are deleveraging - net debt is expected to decline by more than 10 per cent in 2014 - and are working to offset margin drags such as rising labour costs,” said Mr Todd.

“While there is little transparency on the level of debt that has funded earnings growth, there are few signs that profitability and return on equity (ROE) are at a structural break point and cannot improve on a cyclical upturn in profit margins.”