Nov. 10 (Bloomberg) -- Emerging-market stocks may rise 28 percent by the end of 2010, with gains slowing from this year’s pace amid concern interest rates and oil prices will increase, according to Morgan Stanley.

The MSCI Emerging Markets Index may rise to 1,200 by the end of next year, compared with the Nov. 6 level of 936.36, strategists led by Jonathan Garner said in a report. They set a forecast of 486 for the MSCI Asia Pacific excluding Japan Index, representing a 23 percent gain from last week, according to a separate report.

“Economies and earnings are recovering and it is likely too soon in the cycle for a major peak in emerging-market equities,” Garner, Morgan Stanley’s chief Asian and emerging- market strategist, wrote in the report dated yesterday. “However, we do face the headwinds of monetary policy tightening and a higher oil price.”

Emerging markets have led the rally in global stocks this year, making up all 10 best performers among the 89 country benchmarks tracked by Bloomberg. The MSCI index for 22 developing nations has climbed 65 percent in the year till Nov. 6, set for its best annual performance since 1993, while the MSCI Asian excluding Japan index has rallied 60 percent during the same period.

‘Local Peak’

The MSCI Emerging Markets Index rose 0.4 percent to 963.06 as of 1:31 p.m. in Singapore, poised for its fifth day of gains. Garner, who predicted in June that the measure will rise to 985 over a 12-month period, said shares in developing nations tend to reach a “local peak in performance” before the Federal Reserve’s first rate increase. Morgan Stanley expects the Fed to start boosting borrowing costs in the third quarter next year.

Even after predicting further gains for Asian stocks, Garner said the “outperformance” of the region within developing nations may end amid higher oil prices. Crude oil prices may average $85 a barrel in 2010, $95 a barrel in 2011 and $105 a barrel in 2012, the brokerage has predicted.

Barclays Wealth is also turning more cautious on Asia, saying that it has reduced its recommendation on the region to “neutral” from “overweight.”

“We’ve had a strong bounce,” said Manpreet Gill, Singapore-based strategist for Asia at Barclays Wealth, which has $223 billion in assets. “We expect the focus to shift.”

‘Micro Themes’

“Micro” themes will dominate emerging markets next year, and investors should favor energy, financial and so-called consumer discretionary stocks, the brokerage said. They also cut technology stocks to “equal-weight” because of valuations and “historical sensitivity to a global rate hike cycle,” according to the note sent to clients.

Investors should buy shares in its so-called Best Business Models list, including Reliance Industries Ltd., India’s biggest refiner, and Ctrip.com International Ltd., China’s largest online-ticketing agent, the strategist also said.

Morgan Stanley added that China offers the “most significant country opportunity” within Asia and emerging markets and that the nation’s stocks remain its biggest “overweight” among developing nations. South Africa is its largest “underweight,” according to the report.

To contact the reporter on this story: Allen Wan in New York at awan3@bloomberg.net Shiyin Chen in Singapore at schen37@bloomberg.net.

Last Updated: November 10, 2009 00:32 EST