Serious Money: While the equity rollercoaster will trundle on, the real excitement - and the prospect for much higher returns - is now outside the main markets, writes Chris Johns

There is much talk among market participants about things now starting to wind down as the Christmas festivities approach. Quiet Decembers are always forecast but, like many other supposed market regularities, often fail to turn up.

There are plenty of ways in which the close of 2004 could end up with plenty of volatility, with the list of usual suspects including the gyrations of the dollar and the oil price. But many investors will be hoping that the equity gains that we have seen this year will not be eroded by unforeseen events.

In Europe, it has been a solid, but not terribly spectacular, year for stocks. To date, returns of around 8 per cent from the top 300 European companies may not sound like much but are more than most people were expecting this time last year.

If we retain to these gains, we will have seen a second successive year of outperformance of stocks relative to bonds and a second year of healthily positive, real, inflation-adjusted returns. When we add in dividends and subtract inflation, we are left with a real return that will please many actuaries and will be a big relief to firms struggling with under-funded pension schemes.

The range of returns seen so far across the world's developed equity markets is extremely wide. In Europe, the stellar performer has been Austria, up 43 per cent so far. Globally, the weakest performer has been the US: the S&P has delivered barely 6 per cent in dollar terms - around 3 per cent when adjusted back into euro.

For asset allocators, this year has served as another reminder that the big calls are still the important ones: get the regional or country decision correct and you will go a long way to generating outperformance - stock selection mistakes can be hidden by the right country bet or an inspired currency guess.

Away from mainstream exchanges, there have been rich pickings to be had in emerging stock markets.

Indonesia, Malaysia, the Philippines, Singapore and South Korea have all offered returns comfortably into double digits for the euro-based investor. Local players in those markets have also achieved stellar returns, with the exception of Korea, whose 17 per cent euro return falls to "only" 9 per cent when adjusted back into Korean won terms.

But the returns seen in the Asian markets have been dwarfed by opportunities elsewhere. The two best-performing markets have been Colombia and Egypt, where share prices have virtually doubled. Latin American stock markets have been on quite a roll this year with Argentina (remember the crisis of only a couple of years ago?), Brazil, Chile, Mexico, Peru and Venezuela delivering numbers that beat, often by a long way, mainstream markets. Countries as diverse as Israel and South Africa have also been excellent investment destinations for the European investor.

Eastern European equity markets have yielded superb returns: around 52 per cent in the case of the Czech Republic, 60 per cent in Hungary, 34 per cent in Poland and 15 per cent in Russia (all in euro terms). Of all the emerging markets, only Thailand and, interestingly, China have been disappointing.

Some of these markets are so risky - or simply so small - that high achieved returns need to be viewed with caution. The Chinese stock market is tiny and most individual and institutional investors would be well-advised to stay away (there are plenty of ways of playing the China story without running the risks that go with direct purchase of mainland equities). We also need to remind ourselves that many emerging markets have delivered negative returns for the whole of the past decade (blame the Asian crisis of the late 1990s).

But 2004 has already been an extraordinary year, notwithstanding whatever December brings. We have seen the emergence of a key feature of markets that I believe will be with us for many years to come. Like a lot of things, this new trend has started in the US and will spread to other developed markets, probably those in Europe, very soon. Mature markets like these will offer positive but relatively unexciting investment prospects.

While the market roller coaster will trundle on, the trends are quite clear: equities have matured as an asset class in the US and are showing signs of doing so closer to home. The real excitement - and the prospects of much higher returns - is now outside the main markets.

Investors will have to rethink a lot of preconceived notions about likely returns. At home, the time has long since passed whereby the typical pension fund has needed a high weight in Irish equities: while institutions have steadily sold domestic stocks since the introduction of the euro, there are few funds that can yet boast a weighting appropriate to the size of the Irish stock market within the Euro area.

But the ways in which we think about domestic and overseas equities are going to have to change - and not just because of the existence of the euro.

The way in which we model risk and reward has to adapt. Return expectations have to be lowered for the developed world and raised for the emerging markets; a deeper understanding of the risks that go with each regional equity market needs to be achieved.

None of this is to argue the old cliché about taking more risk to get a certain return.

I fancy that the risk/reward trade-off is shifting in the investors' favour, but only in markets that are still relatively unfamiliar. If 2004 has taught us anything, it is that the cult of the equity is far from dead.

It may be winding down in more familiar markets but is only just getting under way in Asia and Latin America.

Chris Johns is an investment strategist with Collins Stewart. All opinions given are personal.