Markets with lower valuations are expected to continue outperforming other markets, according to Martial Godet, head of investment, new markets, at BNP Paribas Investment Partners.

Emerging markets showed a remarkable rally in September, rising by nearly nine per cent – five per cent ahead of the developed markets. Mr Godet added that this means that the markets rose by 20 per cent in the third quarter and are up by an astonishing 61.2 per cent this year so far.

Brazil und Russia did particularly well, he said in BNP’s New Markets newsletter.

Despite this market rebound, emerging stock valuations are still discounted in comparison to developed markets. Mr Godet therefore believes that “certain emerging market segments still offer attractive investment opportunities. Markets with lower valuations should continue to outperform, in particular if they are backed by real assets.”

This does not only include Russia, but also Middle-Eastern markets, where he sees significant upside potential. He also expects Brazil, host of the 2014 Fifa World Cup and the 2016 Olympic Games, to continue to perform well.

With respect to the Chinese market, he said that stocks with attractive valuations and business activity indicators have great potential for investors interested in more than just Chinese mega-caps and accepting higher volatility.

“We also reiterate our advice to focus on local emerging fixed income markets – global or single country – as they still offer upside potential, and are less at risk compared to Western markets. In particular, we still think that local Brazilian bonds represent one of the best risk-return profiles in the global investment universe.”

During the last few weeks, countries with relatively low valuations compared to the average – Mr Godet names Russia, Turkey, Korea, Brazil and Hungary – achieved higher returns and led the rally, regardless of the fact the national growth rates remain lower than those in other emerging markets, such as China or India.

“South Korea is an exception to this generalisation: not only did its stock market rally sharply in September, but its economy is recovering vigorously,” he said.

Great accommodative monetary and fiscal conditions will help the recovery of the markets to continue. However, while most quantitative easing policies were extended, he expects that interest rates might be raised early next year. When emerging countries will experience the resulting higher inflationary pressures, they are likely to be the first to start tightening, Mr Godet said.

National bank policies, keeping interest rates close to zero per cent, have helped prevent a global meltdown, he said, however, “it cannot be the basis of the next economic cycle and poses large medium term risks, which are also related to the US dollar.”

“As the main driver of the next economic cycle, emerging economies are expected to have a massive influence on both supply and demand.”

He expected the main growth sectors for Columbia, Mexico and Venezuela to be in the area of environmentally friendly technologies, while in emerging countries it will be development of domestic demand.