Volatility looks likely to continue across equity markets in 2012. But the risks we typically care about most are large permanent losses, not volatility. There is a strong case that we do not face a plethora of potential large permanent losses from multi-country investing in emerging markets in 2012. We do from investing in the developed world.

The world this year will continue to be divided into deleveraging developed economies and emerging market economies without excessive debt. The US and Europe will continue to experience sub-trend growth, with the main risk still a return to recession or depression. Many emerging economies will grow close to trend, the main risks being country specific, not least inflation. Developed and emerging economies will continue to experience broadly synchronised intra-year inventory cycles due to the increasingly globalised nature of the manufacturing supply chain, but the underlying growth stories and the demand side conditions will continue to differ markedly.

Emerging countries are highly heterogeneous and no longer share the common feature of potential default should they be cut off from foreign capital for the simple reason that they are now often the net creditors. All their main risk scenarios are either country specific, or emanate from the mess in the developed world. The former can be avoided by a portfolio investor, the latter scenarios all pose greater risks for those invested in the developed than in the emerging world.