Nov. 4 (Bloomberg) -- Emerging markets are poised to extend their biggest rally in a decade as investors borrow dollars to buy stocks, bonds and currencies in the world’s fastest growing economies, according to Arnab Das of Roubini Global Economics.

Investors should take “overweight” positions in developing-nation assets, said Das, the London-based head of market research and strategy at RGE, the research and advisory firm founded by economist Nouriel Roubini. While emerging markets will have “occasional corrections,” the surge in asset prices “has many legs to go,” Das said in an interview.

The MSCI Emerging Markets Index of shares has soared 62 percent this year, beating annual gains since 1999, while JPMorgan Chase & Co.’s EMBI+ Index of bonds returned 23 percent. The Brazilian real and South African rand each strengthened more than 20 percent against the dollar. The rallies are being fueled by so-called carry trades that will stay profitable “for a while” as the Federal Reserve keeps interest rates near zero to revive the U.S. banking system from its worst crisis since the 1930s, according to Das.

“The dollar-funded carry trade is the trade du jour,” said Das. “This flow of capital into emerging markets is based on better fundamentals for the near term than the G10” through “better growth prospects because of structural reforms and ongoing integration into the world economy,” he said.

Roubini Hiring

Das, the former head of emerging-markets strategy at Dresdner Kleinwort, joined RGE last month to lead a new team that advises investors on allocations in stocks, bonds, interest-rate products, commodities and currencies in developed and emerging markets. The company plans to hire about 17 strategists, Das said yesterday. Roubini, an economics professor at New York University and chairman of RGE, predicted the financial crisis that spurred more than $1.6 trillion of credit losses and asset writedowns at global financial companies.

While Roubini’s 2006 warning about the crisis helped shield clients from the worst slump in global equities since at least 1988, shares have rallied since March even as Roubini said that month the advance was a “dead-cat bounce.” He said in May the rally may fizzle and warned in July that the economy is “not out of the woods.”

‘Mother of Carry Trades’

Investors worldwide are fueling “huge” bubbles that may spark another financial crisis by borrowing dollars in “the mother of all carry trades,” Roubini said via satellite to a conference in Cape Town, South Africa, on Oct. 27. Roubini said today that the increase in asset prices has been “too much, too soon, too fast,” speaking at a commodity conference in New York.

“Roubini may be right to warn about dangers, but is premature to label the market recovery since March as illusory,” Charles Robertson, ING Groep NV’s London-based chief emerging Europe economist, wrote in a research note today. “Recent data suggest after a nervous period ahead, markets still have room to rally into February-April 2010.”

Jim Rogers, the investor who predicted the start of the commodities rally in 1999, said that Roubini is wrong about the threat of bubbles in gold and emerging-market stocks.

“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”

Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.

BRICs

The MSCI emerging-market index has dropped 5.9 percent from its 2009 high on Oct. 19 on concern the rally has outpaced the prospects for earnings and economic growth. The 22-country gauge had jumped as much as 115 percent from its October 2008 low, sending its price-to-earnings ratio to the highest level since 2000, according to Bloomberg data.

The four biggest developing economies -- China, Brazil, Russia and India -- will expand 4.4 percent as a group in 2009, compared with a 3.6 percent contraction in advanced economies, RGE forecast in a research report last month.

“We’re recommending that people continue to invest in emerging markets because that’s where a substantial part of the growth is going to come from in the world,” said Das.

The rally may eventually turn into a “bubble” driven by speculative debt-financed buying that risks bursting as soon as the Fed starts raising interest rates. Investors would rush to reverse their dollar-funded carry trades and sell their holdings in developing nations, he said. Fed policy makers end a two-day meeting today, with economists predicting the central bank will say it needs to keep borrowing costs low to sustain growth.

In a carry trade, investors borrow in countries with low interest rates to invest in higher-yielding assets.

“There’s going to come a problem when the Fed has to normalize monetary policy,” said Das. “All those carry trades are going to be unwound.” Still, he said, “it’s going to take a long time to get there.”

-- With assistance from Laura Cochrane and Kenneth Kohn in London. Editors: Stephen Kirkland, Gavin Serkin.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

Last Updated: November 4, 2009 10:34 EST