Emerging-market stocks will advance 32 per cent

Developing-nation stocks may rise 32 percent in the next 12 months as a faster-than-expected earnings recovery fuels a long-term bull market, Morgan Stanley said.

The MSCI Emerging Markets Index may climb to 985 by June 2010 from its closing price of 743.72 yesterday, Jonathan Garner, Morgan Stanley’s chief Asian and emerging-market strategist, wrote in a research note. Profits will rebound 28 percent next year after a 15 percent slide in 2009, Garner wrote. That compares with his earlier forecast for a 20 percent gain in 2010 and a 25 percent drop this year.

The London-based strategist still reduced his recommended allocation to developing-nation equities, saying he’s “tactically cautious” because the global economic recovery may stall. The MSCI gauge may slide as much as 33 percent from its 2009 high during the next three months as weaker economic data from China and the US spark a “correction,” Garner wrote.

“We continue to believe that Asia and emerging-market equities are in a secular bull market,” Garner wrote. Still, “we would not chase the market here over the summer months.”

The 22-country benchmark surged 55 percent from February through May, a record three-month advance, on speculation that earnings will rebound as the global recession eases. The rally stalled this month as valuations reached the most expensive level since December 2007.

‘Correction’
Garner’s previous forecast for the MSCI gauge was for a rally to 810 by the end of 2009. He reduced his recommended equity allocation to 54 percent of an emerging-market portfolio from 56 percent and advised investors to increase cash holdings to 5 percent from 3 percent.

Garner’s call for a “correction” in emerging-market stocks contrasts with a more bullish short-term outlook from Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asian and emerging-market strategist.

Mowat wrote in a report that he sees “no obvious fundamental triggers for correction” and investors should take advantage of this month’s retreat in stocks to “position” for further gains through the end of the year.

“Potentially, we are in a powerful rally in emerging- market equities,” Mowat said.

Developing nations may grow their share of global gross domestic product to about 35 percent by next year from 20 percent a decade ago, Garner said. That will help boost emerging markets’ weightings in global stock indexes, he added.

“We anticipate that demographic trends and the adoption of the market economy in most EM countries will sustain the recent trend towards a more EM-centered global economy,” Garner wrote.

The authors are Bloomberg News columnists The opinions expressed are their own