Jan. 30 (Bloomberg) -- Watching emerging-market equities stumble into 2007 after their four-year ascent may leave investors wondering whether the ride is over.

It's not, though you wouldn't know it from the Morgan Stanley Capital International Emerging Markets Index, which is down about 1.2 percent this month. Nor from Venezuelan President Hugo Chavez's latest shenanigans, which seem to resurrect the axiom that an emerging market is one from which you can't emerge in an emergency.

On Jan. 8, the 52-year-old former paratrooper unveiled plans to nationalize Venezuela's telephone, oil and power industries. About two weeks later, he added the nation's central bank to his shopping list. Then, Chavez said he wouldn't pay shareholders the market price for CA Nacional Telefonos de Venezuela.

The result: The Caracas Stock Exchange Index has lost 30 percent in just 15 trading sessions.

Elsewhere, Ecuador's new government said it may repay only 40 percent of its foreign debt. Bolivia is playing the nationalization card. And Russian officials are busy muscling foreign oil companies into surrendering stakes in drilling ventures.

In Hungary, inflation is headed for a six-year high of 10 percent. Meanwhile, the bungled imposition of controls on foreign investment has sent Thailand's SET Index tumbling 10 percent since Dec. 18.

So much for the bad news.

Young Surge

From the end of 2002 through 2006, MSCI's Emerging Markets Index had a total return of 240 percent in dollars, making for an average annual increase of 36 percent. That compares with a 73 percent total return for the Standard & Poor's 500 Index, 106 percent for the Dow Jones Stoxx 600 Index in Europe, and 108 percent for Japan's Nikkei-225 Stock Average.

What's more, Michael Hartnett, head of emerging-markets strategy at Merrill Lynch & Co. in New York, says that by historical standards, the four-year emerging-markets surge is still young. From late-1973 to mid-1983, U.S. small- capitalization stocks rose every year, returning an average of 31 percent annually. In the 1970s and 1980s, Japanese stocks rallied an average 24 percent annually for 12 years.

``Emerging markets are in the midst of one of the great bull markets,'' Hartnett says. ``Their massive savings -- bolstered by a projected aggregate $700 billion current-account surplus in 2007 -- can boost economic growth and asset prices for many years to come.''

Investment-Grade Debt

Emerging markets account for 80 percent of the world's population, 75 percent of its land mass, 66 percent of foreign- exchange reserves and 50 percent of its gross domestic product, based on purchasing-power parity -- but only 8 percent of world equity-market value, Hartnett says. What's more, 40 percent of developing-country debt is now investment grade, up from 3 percent a decade ago.

Since 1999, developing countries on average have also reduced their foreign-currency-denominated debt to 10 percent of GDP from 90 percent, according to Steven Schoenfeld, New York- based chief investment officer for global-quantitative management at Northern Trust Global Investments, which oversees $697 billion.

Other improvements include narrowing fiscal deficits, an aggregate current-account surplus of 3.5 percent of GDP in 2005 and halving inflation to 5 percent. Brazil's annual inflation rate is 3.1 percent; in 1994, it peaked at a whopping 4,922 percent.

Allocation Key

``The most important decision for investors is how much they should allocate to emerging-market investments, rather than whether or how to allocate,'' Schoenfeld says.

Meanwhile, Hartnett predicts that local investors -- especially in Asia -- will increase spending on consumer goods, property and infrastructure projects, making emerging economies less dependent on commodities and exports for growth.

The potential is enormous: Consider that the total market value of emerging-market consumer stocks is roughly $326 billion, 0.4 percent of the developed world's $7.7 trillion. Or that mortgage loans in Brazil equal 2 percent of GDP, in Russia 0.5 percent, in India 5 percent and in China 9 percent, according to Merrill Lynch estimates -- compared with 66 percent in the U.S.

Are there risks? You bet. Strategists at Citigroup Inc., UBS AG and HSBC Holdings Plc are advising clients to be wary of China, whose Shanghai and Shenzhen 300 Index has soared 155 percent in the past 12 months, including 26 percent in 2007. At 38 times projected 12-month earnings, the index's price-earnings ratio is more than double the MSCI Emerging Markets Index's 15.

Emerging-market ``sentiment remains at euphoric levels,'' Citigroup analysts said in a Jan. 16 report.

`Ugly Inflation Numbers'

``The risk of emerging markets having another correction is rising, because markets have gone up so much,'' Hartnett says. In the past, emerging-market sell-offs have been triggered by investor complacency -- as evidenced by big inflows into these markets -- ``and ugly inflation numbers,'' he says.

``Absent a global recession or a dramatic rise in inflation and/or a meltdown in commodity prices, there's still a lot to play for,'' Hartnett says.

So decide how much you want to allocate to these stocks, invest broadly to guard against the periodic blow-up and don't look back.

As movie director Woody Allen would probably agree, success with investing is often just a matter of showing up.

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the reporter on this story: Michael Sesit in Paris at at msesit@bloomberg.net

Last Updated: January 29, 2007 19:11 EST