Strategists and money managers at some of the biggest banks and investment firms are forecasting gains for emerging-market stocks next year, driven by low valuations and signs that governments will act to boost growth.
Morgan Stanley’s Jonathan Garner lifted his recommendation to “maximum overweight” for the first time since October 2008, according to a report today. Citigroup Inc.’s Markus Rosgen said Asian stocks may surge 30 percent, while Credit Suisse Group AG’s Sakthi Siva predicted 10 percent gains. Antoine van Agtmael, who coined the term “emerging markets” in 1981 and now oversees $7.4 billion at Ashmore EMM LLC, said the stocks are “cheap.” Pacific Investment Management Co.’s Masha Gordon has been buying equities most reliant on economic growth.
“Emerging markets as a group are now as attractive as I have seen them on both a historic and comparative basis at any time in the last 25 years,” van Agtmael, a former World Bank official and author of “The Emerging Markets Century,” said in a Nov. 29 phone interview. “I see 2012 in emerging markets as a year of positive investment returns, positive economic growth and positive earnings growth.”
Investor confidence in developing-country equities is increasing as central banks from China to Brazil loosen monetary policy to shield their economies from Europe’s debt crisis and high U.S. unemployment. The MSCI Emerging Markets Index is valued at 9.5 times profit forecasts for the next 12 months, a 17 percent discount to the five-year average, according to data compiled by Bloomberg. The 21-country gauge has climbed 9.4 percent this week, paring this year’s retreat to 17 percent.
The People’s Bank of China cut reserve requirements for lenders by half a percentage point to 21 percent on Nov. 30, the first reduction since 2008. Brazil’s central bank lowered its benchmark interest rate for the third time since August at a meeting the same day, while Thailand reduced borrowing costs, the first cut in more than two years.
The MSCI index may climb to 1,210 by the end of next year, according to Garner, the chief Asia and emerging-market strategist at Morgan Stanley in Hong Kong. That’s 26 percent higher than its level of 961.93 at 11:50 a.m. London time.
Investors should hold 10 percent more emerging-market equities than are represented in benchmark weightings and cut cash allocations to zero, Garner wrote in a note. He recommended the biggest emerging-market companies by market value, stocks with high and growing dividends and gold producers. MSCI index profits may grow 9 percent in dollar terms next year, he said.
Emerging-market stocks “remain in an earnings-driven secular bull market,” Garner said.
Central banks in Asia will keep easing monetary policy as inflation subsides, boosting shares of banks and real-estate companies, Rosgen, a Hong Kong-based equity strategist at Citigroup, wrote in a report dated yesterday. When stock valuations fell this low during the past 36 years, shares were higher after 12 months 92 percent of the time, according to Rosgen.
“The risk-reward has seldom been better,” he said.
Equity valuations in Asia are “pricing in” a recession in developed economies, though not a financial crisis, according to Siva, Credit Suisse’s global emerging-market and Asia strategist in Singapore. She said the MSCI All-Country Asia ex-Japan Index will end next year at 527, compared with the current level of 478.73, according to a research report today.
China may cut banks’ reserve ratio by as much as three percentage points in the next 12 months, Masha Gordon, the head of emerging markets equity portfolio management at Pimco, which oversees about $1.35 trillion worldwide, said in an interview yesterday. Inflation in the country may slow to between 3 percent and 4 percent from 5.5 percent in October, she said.
Gordon has been buying raw-materials producers and Chinese industrial companies after they posted some of the world’s biggest declines this year. Her PIMCO EqS Emerging Markets Fund still has a “defensive bias” and is using options to hedge against potential “extreme” market declines.
While there’s a chance that Europe’s sovereign-debt crisis may drag the world economy into recession, it’s not the most likely scenario because policy makers will act to restore confidence, according to Ashmore’s van Agtmael.
Global equities rose today, poised for the biggest weekly advance in three years, after German Chancellor Angela Merkel renewed her push for European fiscal union. U.S. payrolls probably climbed by 125,000 in November after rising 80,000 in October, economists said before today’s Labor Department report.
Developing economies may expand 6.1 percent as a group next year, compared with 1.9 percent growth in advanced countries, according to September forecasts by the Washington-based International Monetary Fund.
“I place my bets on the view that global growth will be anemic but that we’re not going to have a 2008-like crisis,” van Agtmael said. “Things look cheap relative to fair long-term value.”