INVESTMENTS: Who needs the hassle of worrying about the state of the nation in Pakistan? There are simpler and safer ways to earn a return on your money

With six months of the year now elapsed, it seems a good time to stop and take stock of what has happened in the markets this year. Like all columnists, it behoves me to claim that all my predictions so far have come true - but to a surprising extent, given my views about the perils of forecasting, that does appear to be the case.

A year ago, for example, I predicted that the one certainty for 1996 was that house prices would start to rise strongly - a prediction that is certainly being borne out. I was also confident that the Japanese stock market would bounce back - and so it has, rising 50 per cent in the past 12 months.

At the beginning of this year, I expected Wall Street to continue stronger than most people expected - despite the market being clearly overvalued and heading for a substantial correction. (Is that a contradiction? No. There is no rule that markets need to behave in the short term as rational valuation measures imply. All the evidence is that they do the reverse. Wall Street was up 11 per cent at the halfway stage, regardless of what might happen now.)

I have also been mostly downbeat about the UK stock market for some months, seeing no real upside in a market that is running out of takeover steam, but running into pre-election nerves. My view remains that for the moment there is better value in gilts than in shares. Recent events seem to bear this out. Having started out the year in strong form, the stock market has moved nowhere but sideways for the last four months.

There is one area where I have to admit to an error in judgement, and that concerns emerging markets. Three years ago, this was every professional investor's favourite sector. We heard a lot about the case for investing in countries in long-neglected parts of the world - the obscurer the country the better.

A good number of investors piled in, lured mainly by three plausible arguments: (1) that the end of Communism had transformed the economic prospects of many backward countries; (2) that the long-term growth potential of many emerging market economies, such as China or India, outweighed the obvious short-term disadvantages, such as corruption, economic illiteracy and so on; and (3) that there were clear investment advantages in diversifying into stock markets which moved independently of the main markets in New York and London.

Then came the bond market wobble of early 1994, followed by the Mexican devaluation crisis at the end of 1994. Since then, emerging markets have been largely out of favour. The IFC emerging market index, for example, fell by 14 per cent in 1994 and by a further 18 per cent in 1995.

This year, however, the emerging market bandwagon appears to be back on track. At new year, most pundits were expecting a strong performance. I was sceptical, mainly on the grounds that I had no idea which emerging markets would do well and which would not. In the event, nearly all of them have gone up. The IFC composite index is up by over 15 per cent this year, led by big gains in Russia, Hungary, Venezuela (all up over 100 per cent) and Turkey.

As Alison Eadie writes on page 24, the expert view is that private investors are now being encouraged to put their toes back in the water. Many emerging markets are now selling on undemanding ratings by historical standards, though, like all the major stock markets, many will be taking their lead from what happens to Wall Street and to American interest rates in the next few months.

But I still have my doubts about the whole phenomenon. It is true that the long-term demographic and economic arguments for investing in emerging markets are powerful ones. Asia is going to grow much faster than Europe or the US for the foreseeable future. By the early part of the next century, on present trends, Asia will be a bigger economic zone than all the OECD countries together.

An emerging market fund still seems, therefore, a sensible way of diversifying a large share portfolio, or hedging a long-term investment scheme, like a pension fund. But while the returns can be spectacular, they are also very volatile. In the longer term, the countries whose markets do best are those with the best ordered economies. According to Micropal, for example, the best returns, adjusted for the risk involved, over the last seven years have come from Chile and the Philippines, which seems fair enough. But in the shorter term, picking the winners is a bit like trying to guess the winning National Lottery numbers.

Which of us has perfect foresight? The Venezuelan stock market, one of this year's biggest winners, has been a disaster for the last four years. Did you spot its recovery potential? My point in January was that the definition of an emerging market is now so wide as to be virtually meaningless. Keeping track of them all is far too onerous, even for professionals.

So nobody should kid themselves that emerging markets are one-way tickets to riches. Only if you have money that can be safely put aside for relatively long periods, and if you are prepared to live with an up and down ride, should you consider venturing into them. The risks are much greater than they appear on the surface, and unless you have a strong reason for believing a particular country is going to do well, investing through a well capitalised and reputable diversified fund - a Templeton, Foreign & Colonial, and so on - remains the only sensible route. (Templeton's has been the second best performing emerging market fund over the past seven years, beating many of the specialist single-country funds).

Emerging market pundits are likely to tell you that the Pakistanimarket, down 34 per cent last year, is about to rebound. It certainly doesn't sound as if it could get much worse. "In the face of a virtual collapse of law and order in Karachi," declares the latest annual report of one of the better known emerging market funds, "two years of agricultural recession, religious strife, institutional corruption and continued mismanagement, reflected in an underlying inflation rate of around 20 per cent per annum, the surprise is that the Pakistani economy isn't in even worse shape".

Who needs the hassle of worrying about the state of the nation in Pakistan? There are simpler and safer ways to earn a return on your money.