Nov. 10 (Bloomberg) -- Investors should buy options on emerging-market stocks while selling contracts on U.S. shares because developing nations are likely to lead the rally in global equities into next year, Bank of America Corp. said.

Chintan Kotecha, a New York-based equity derivatives strategist, recommended buying June at-the-money options tied to the iShares MSCI Emerging Markets Index, a U.S. exchange-traded fund tracking shares in 22 developing nations, while selling June at-the-money calls on the SPY, an ETF linked to the Standard & Poor’s 500 Index.

Emerging-market shares have led a global rally this year after central banks around the world slashed interest rates to spur lending, while governments including China and the U.S. enacted $2 trillion of stimulus packages to revive spending by consumers and businesses. The emerging-markets ETF, also known by its EEM ticker symbol, has surged 65 percent this year, more than triple the return for the SPY.

“Emerging markets have significantly outperformed both through the bull market that preceded the credit crisis from 2003 to 2007 and through the rally from the lows post-crisis,” Kotecha wrote. “Only in the period in the late 90s did the U.S. outperform emerging markets as crises in Southeast Asia and currency devaluations weighed in on those markets’ performance. However, emerging markets have changed much since and are now better positioned.”

June $40 calls on the EEM cost about $4.05, or about 10.2 percent of the underlying security price, while June $107 calls on the SPY are $7.35, or about 6.9 percent of the ETF, Kotecha wrote. That means the options market is signaling that the EEM will outperform the benchmark for U.S. stocks by 1.5 times over the next six months, the strategist wrote.

Emerging-Markets Outlook

Emerging-market stocks are poised to gain 25 percent by the end of next year, for the steepest two-year rally since 1989, as earnings surge and investors boost holdings in the fastest- growing economies, Morgan Stanley said in a note yesterday.

The EEM lost 0.5 percent to $40.92 in New York, while the SPY advanced 2 cents to $109.59.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

Last Updated: November 10, 2009 16:38 EST