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BlackRock Picks Emerging Stocks for Second Half, Predicts Slower Inflation

BlackRock Inc., the world’s largest asset manager, recommended a return to stocks in emerging markets including China and Brazil in the second half of the year because slowing inflation will make them more attractive.

“As we get into the back half of the year, some of the near-term cyclical inflation we’re seeing right now in China, Brazil and most other emerging markets will start to abate,” Russ Koesterich, the San Francisco-based head of investment strategy for scientific active equities at BlackRock, said in an interview on Bloomberg Television. The second half is “probably a great time to rotate back into emerging markets,” he said.

The MSCI Emerging Markets Index that tracks 21 developing nations has lost 5 percent this year, compared with a 4 percent advance for the MSCI World Index, a measure of 24 developed nations. Global-tracked emerging-market equity funds had more than $7 billion of outflows in the week ended Feb. 2, the most in three years, according to EFPR Global. Investors channeled part of the funds into the U.S., Japan and other developed nations, the research company said.

MSCI’s emerging market index advanced 0.7 percent to 1,094.12 as of 5:29 p.m. in Shanghai.

The Shanghai Composite Index has dropped 6 percent in the past 12 months. The government raised banks’ reserve requirements for a second time this year on Feb. 18, after an interest-rate increase on Feb. 8. Inflation accelerated to a 4.9 percent annual pace in January, exceeding the government’s 2011 target for a fourth month. The measure was little changed at 2,878.57 at the 3 p.m. close.

China’s February inflation rate may ease to 4.8 percent because of slowing rises in food prices, according to Shenyin & Wanguo Securities Co.

Brazil, China

Brazil’s benchmark Bovespa index has declined 3.4 percent this year on concern rising inflation will spur additional measures to restrict credit growth, overshadowing gains in oil and raw-material producers. The index trades for 10.6 times analysts’ estimated earnings, according to weekly data compiled by Bloomberg. That compares to a ratio of 13.3 for the Shanghai Composite, 7.1 for Russia’s Micex, and 17.3 for India’s Bombay Stock Exchange Sensitive Index.

Koesterich cautioned against India as it looks more “expensive” than most other markets. “The problem is India has been arguably less aggressive than some of the other central banks in emerging markets in draining reserves from the banking system,” he said.

The Sensex slid 3 percent yesterday to close at 17,632.41, its biggest drop since Nov. 3, 2009. The Sensex has lost 7.9 percent since Central bank Governor Duvvuri Subbarao on Jan. 25 increased interest rates for the seventh time in a year and forecast inflation will accelerate to 7 percent by March 31. That’s above the target of 4 percent to 4.5 percent.

“I’m less confident that we’ll see a near-term inflation deceleration in that market,” Koesterich said. “ India’s central bank has more work to do.”

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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