Although we mainly avoided EMERGING MARKETS during the first half of Q1 2010,our position has grown increasingly favorable.  As excerpts from a recent Bloomberg (below) indicate, our view is shared by the likes of Morgan Stanly, Credit Suisse, and Goldman Sachs.  We know it takes a leap of faith to invest in EMs after their poor start this year.  But stepping back and considering their projected economic growth rates, is it really surprising that a significant part of your MARKTORS PORTFOLIO should be invested there?  However, to be sure, there are contrary opinions…

– Keith DeGreen

Emerging Stock Funds Losses Show Repeat of ’04 Rally

By Michael Patterson (redacted excerpts only)
Feb. 8 (Bloomberg) — The biggest tumble in developing-nation stocks in 11 months is making investment strategists at Morgan Stanley, Credit Suisse Group AG and Goldman Sachs Group Inc. as bullish as ever.

Morgan Stanley’s Jonathan Garner predicts the MSCI Emerging Markets Index will surge 34 percent by the end of 2010 as corporate profits jump 40 percent. Sakthi Siva of Credit Suisse says declines in the 22-country gauge may be limited to 5.3 percent. Goldman’s Thomas Deng recommends investors buy in China, where he forecasts the CSI 300 Index will gain 36 percent in the next 10 months.

The strategists say developing markets are showing parallels with May 2004, when the MSCI index recovered from a two-month tumble of 11 percent to rally 26 percent by the end of the year. Like then, investors are pulling money out of emerging-market funds on concern lending curbs by China and interest-rate increases from India to Brazil will restrain economic growth.

“The emerging world is going to come out of this in stronger shape,” said Julian Mayo, investment director in London at Charlemagne Capital, which oversees about $3 billion. “This is one of the speed bumps along the way. 2004 ended up being a good year for emerging-market investments.”

The MSCI gauge lost 13 percent from its 2010 peak on Jan. 11, the biggest decline since a 16 percent drop that ended March 2, 2009. The index fell 3.8 percent last week to 897.70, the lowest level since Sept. 15, and slid 0.4 percent to 894 as of 12:38 p.m. in Singapore. MSCI Inc.’s measure of advanced-nation shares dropped 2.2 percent last week.

Gazprom, Vale

Moscow-based OAO Gazprom, Vale SA of Rio de Janeiro and Industrial & Commercial Bank of China Ltd. in Beijing led a retreat of energy producers, raw-materials companies and lenders after policy makers in China and India raised banks’ reserve requirements last month to slow credit expansion in the world’s fastest-growing major economies.

Emerging-market stocks also sank as state-controlled Dubai World failed to present a restructuring plan for $22 billion of debt and speculation increased that Greece, Spain and Portugal may struggle to repay lenders as their budget deficits widen.

“Everyone was feeling very sanguine about China going into the fourth quarter and now you’ve got tightening measures,” said Nikhil Srinivasan, who helps manage about $30 billion as chief investment officer for Asia and the Middle East at Allianz Investment Management in Singapore. “Greece is a problem, not because it’s a big country, because it’s the eurozone. That’s a problem for risk.”

Fund Losses

Emerging-market mutual funds had the second week of outflows in the week ended Feb. 3, totaling $1.6 billion, while individual investors withdrew $612 million, according to Cambridge, Massachusetts-based research firm EPFR Global. Professional and private investors took out a combined $1.4 billion from emerging-market funds during the third and fourth weeks of the 2004 retreat, EPFR data show.

Chinese policy makers helped spark the 2004 selloff in April as they raised reserve requirements for banks and told lenders to stop financing overheated industries, spurring concern the government would increase interest rates from the lowest levels on record.

The MSCI gauge fell 11 percent in April and May, then rebounded 26 percent through the end of the year as developing-nation economies grew 7.5 percent and corporate profits jumped 66 percent, according to data compiled by the International Monetary Fund and Bloomberg…

…Profits at MSCI index companies will rebound 40 percent in 2010 after a 15 percent decline last year, according to Garner, the chief emerging-market strategist at Morgan Stanley in London.

Record Fund Flows

Investors poured a record $64.5 billion into emerging-market equity mutual funds in 2009, according to EPFR Global. Developing markets were the most-favored among global money managers surveyed by Charlotte, North Carolina-based Bank of America Corp. last month.

“If you look at the amount of money that’s flowed into these funds, it’s stunning,” said Aronstein, chief investment strategist at Oscar Gruss in New York and manager of the $117 million Marketfield Fund. “That’s where the retail investing public has an awful lot of exposure as well as many
institutions. We’re short in a pretty big way.” (Keith’s comment: Hey, the guy’s entitled to his opinion!)

Earnings Beat Estimates

MSCI’s emerging-markets gauge is still 33 percent below its 2007 record, even after rallying 97 percent from a four-year low in October 2008. Valuations in China, the biggest developing market, are half what they were at their all-time high in 2007.

The CSI 300 trades for 26 times earnings, compared with 52 at the gauge’s peak, Bloomberg data show. China’s lending slowdown may benefit the domestic economy by reducing risk, and investors should still buy shares of the nation’s banks, Mark Mobius, who oversees about $34 billion as chairman of Templeton Asset Management, said in a Jan. 27 interview in Sydney. Goldman’s Deng says the government is taking “prudent” measures to prevent asset bubbles and predicts the CSI 300 will climb to 4,300 by the end of 2010 from its closing price last week of 3,153.09.

“Strategically we’re still positive on the market,” Deng, the head of China strategy at Goldman in Hong Kong, said in a Jan. 21 interview with Bloomberg Television. Company analysts remain bullish on emerging markets, predicting an average gain of 21 percent for stocks in the MSCI gauge over the next 12 months, according to more than 1,500 price estimates compiled by Bloomberg. Among companies in the index that reported fourth-quarter earnings so far, 49 topped estimates, compared with 34 that trailed projections, Bloomberg data show.

“It’s similar to the environment of 2004,” said Morgan Stanley’s Garner. “We should have pretty strong economic and corporate profits growth.”