Emerging Markets To Rebound Up to 30 Percent in 2012


The tide appears to be turning for emerging markets (EM), after a dismal year that saw the MSCI emerging markets index fall by 20 percent, lagging both the European and U.S. markets. According to Citi’s global emerging markets equity strategist Geoffrey Dennis, the outlook for this asset class is bright, with interest rates set to head lower and the likelihood of a soft landing for China’s economy.

Dennis says the conditions that contributed to the outflow of funds from emerging markets last year have eased, and he expects a 25-30 percent rebound in EM stocks in 2012.

“(The) thing that really hurt emerging markets last year was a much sharper interest rate cycle and inflation cycle than any of us had anticipated in the beginning of the year and that was the big negative. And as we head into 2012, that is all over now. Interest rates are not going up any more in the emerging markets and I think that will create better conditions for the year ahead,” he told CNBC on Wednesday.

Sky-high inflation in China, which have forced authorities to tighten monetary policies for much of 2011 and taken a toll on stock markets as a result, is set to ease in 2012, says Citi. The bank expects the country’s consumer price index to fall to an average 4.1 percent, after hitting a summer peak of 6 percent in 2011.

“This sharp drop in inflation should open the way for easier monetary policy,” the bank said in a report. Citi, which is overweight in Chinese stocks, is expecting as many as eight 50-basis point cuts in the reserve requirement ratio this year, with the first coming before Chinese New Year.

Citi does not expect a hard landing for China’s economy, and predicts a fall in the country’s growth rate to 7.5-8 percent in the current quarter before rebounding by the end of the year. “Full year growth (is) probably going to be around the 8.5 percent level, and that is consistent with a soft landing,” Dennis said.

Citi is also bullish on South Korea, where central bankers are also expected ease monetary policy in 2012. The Bank of Korea (BOK) has kept rates steady since it last hiked rates by 25 basis points in June last year.

“The BOK probably begins to cut interest rates sometime in the first half of 2012,” Dennis said.

“We have overweights right now in Korea, in China.. so we’re playing the value story particularly in Korea and China in the sense that markets are very cheap there and we do expect the economic numbers to begin to bottom out.”

Also expected to support stocks is the stabilization of emerging market currencies, which have been battered late last year against the U.S. dollar.

“We think the dollar is going to be more of a neutral factor for emerging markets this year, what that means in practice is that these currencies which have come under some pressure towards the end of last year began to stabilize, and that of course will be very important for getting money coming back to the emerging markets,” Dennis pointed out.

Still, the outlook for EM will hinge on the global economic environment, particularly Europe, which Citi isn’t expecting a worst-case scenario.

“We don’t expect the global economy to blow up here and go back into the sort of conditions we had in 2009. We don’t expect there to be a cathartic break up of the euro in 2012. (But) both of those are very important assumptions,” he said.

CNBC.com | January 04, 2012 | 12:42 AM EST

Learn more about Ron Sloy.


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