Emerging Markets Still the Place to be: Strategist

Investors have been rotating out of emerging markets into developed markets in recent weeks, driven partly by inflation fears and an aversion to risky assets. In all, since the beginning of the year, $21 billion has flowed out of emerging market stocks, the largest outflow since the third quarter of 2008, according to fund tracker EPFR Global.

Some strategists are warning that this selloff may have been overdone. "Being underweight emerging markets is a very dangerous thing in the long term," Jim McCaughan, CEO of Principal Global Investors told CNBC on Monday. Click here for full interview.

Emil Wolter, Head of Regional Strategy for Asian Equities at RBS said the recent selloff was being driven by money flowing out of Exchange Traded Funds (ETFs), which he said were speculative in nature. "Our view has been for some time the fund outflows that have taken place since the beginning of the year reflects a partial reversal of the hot money that arrived into emerging markets in the wake of QE2 introduction."

Wolter now thinks this correction is almost complete. "In our analysis, it shows something like 80 percent of the hot money that came into the emerging markets segment, have come out again already. So we think we are closer to the end of this trend than the beginning,"

Having corrected, he now thinks emerging market stocks are looking more attractive. "We think the underlying dynamics don't look too bad for emerging markets at this point...The big picture is that long term government bonds across the developed world look pretty unattractive and the shifts we are going to see is going to be where people take money out of bond funds and put it into equities."

Jim McCaughan, CEO of Principal Global Investors, who has $232 billion in assets under management, has only about 6% of those funds invested in emerging markets. He said a lot of that is dependant on client preferences. And McCaughan admitted that investors in the developed markets were "very under committed to the emerging markets compared with what those markets will be over the next decade or two."

McCaughan said he sees long-term strength in large emerging markets such as China, "(as) hundreds of millions of people have become much more prosperous in part of the global middle class."