The trick now is to choose between value and fashion

Anyone who bought shares in emerging markets in 1996 has had the by now familiar rollercoaster ride. Those who picked the right markets have done handsomely.

The markets in Russia, Venezuela, Hungary and China were all up by 100 per cent or so in dollar terms. Brazil and Poland both managed about 50 per cent, each. On the other side of the ledger, the markets to have avoided included Chile, India, South Korea and Thailand, which all fell sharply.

The last two are now both at their lowest points for more than three years, reflecting the general waning of investors' enthusiasm for the Asian tigers, and underlining why it is a mistake to think of emerging markets as a single cohesive investment class.

The bald statistics for last year fail to do full justice to some dramatic events on the ground - a coup in Pakistan, for example, and high political drama elsewhere, including Russia, the biggest potential stock market of them all. In China, the authorities were forced to impose a 10 per cent limit on daily share-price movements after a panic on the Shenzhen stock market. In Bangladesh, where a wild speculative frenzy sent the local stock market up by 300 per cent in three months before the bubble burst, shares were bought and sold like poultry in the road outside the Dhaka stock exchange - all rather reminiscent, in its way, of Kaffir mania at the turn of the century, when brokers in the City traded shares in the latest speculative South African mining stocks in the street outside the London Stock Exchange.

Where will the emerging markets go this year? Mark Mobius, the energetic polymath who runs Templeton's highly successful emerging market funds, was in London for a day or so recently en route from (I think) Brazil to Russia.

Templeton is a stockpicking firm, not a "topdown" investor. In emerging markets, as in all its funds, the company sticks scrupulously to the research- led discipline which served its founder, the philanthropist Sir John Templeton, so well over so many years. The philosophy is to buy individual shares that look cheap, not to make big bets on particular markets: to diversify across a broad range of countries and sectors; and to look for bargains wherever they can be found. The Templeton style is to be prepared to wait for five years, if necessary, for the value of a share to be reflected in the price.

Mobius is still bullish about the outlook for emerging markets. His research team reckons that there is still plenty of value to be found. Hong Kong is at the top of Templeton's buy list at the moment. The market was up by a third last year, but lingering anxiety about the impact of the switch to Chinese rule this year continues to throw up a lot of bargains for value investors. Mobius thinks that the price of many shares in Argentina and Brazil, two other markets which recovered strongly last year, is also very attractive.

Secondly, says Mobius, despite the so-called "tequila effect" - which saw large numbers of US investors repatriating their money after the Mexican devaluation - underlying demand for emerging market shares is still growing. Not only are increasing numbers of institutional investors being mandated to invest overseas, but many of the leading emerging markets themselves are now starting to generate quite significant domestic demand.

This in turn is helping to reinforce the third key characteristic of emerging markets, which is their low correlation with the established stock markets in New York, London and so on. It is easy to think that the flood of money into emerging markets over the past few years is simply a reflection of the exciting growth prospects of many of the countries involved.

That is only part of the story. Just as important has been the powerful diversification argument which has convinced many institutional investors to invest in countries which they would once have avoided like the plague.

If anything, according to Templeton's research, this trend is accelerating, rather than diminishing. Local buyers are increasingly creating speculative bubbles of the kind recently seen in Bangladesh. That not only creates further volatility but also creates the conditions for prices to get out of line with underlying value - ideal conditions says Mobius, for bargain- hunting outside investors who can distinguish value from fashion.

If he is right, as I suspect he is, it means that the rollercoaster ride is set to continue for a while yet. But don't be fooled into thinking that the risks are somehow no longer there.

If you must play this game, either stick to countries you genuinely know something about, or opt for a broadly diversified fund or investment trust - and prepare to treat the twin impostors with the equanimity urged by Kipling.