Money is pouring into emerging markets at the fastest pace in the past three years as analysts forecast a big year ahead for developing economies.
The average of five estimates for the MSCI Emerging Markets Index next year is 1,463, or 30 per cent higher than yesterday's level and 9.3 per cent above the all-time closing high on October 29 2007. By comparison, strategists are calling for a 9.9 per cent gain in the Standard & Poor's 500 Index and a 14 per cent advance for the Stoxx Europe 600 Index.
"There's a growing realisation that in some ways emerging markets are a safe place to be," said Mark Mobius, who oversees about US$34 billion as executive chairman of Templeton Emerging Markets Group. "I'm quite optimistic."
Emerging-market stock strategists at UBS, Citigroup, JPMorgan Chase, Credit Suisse and Morgan Stanley are more optimistic than their counterparts following the US and Europe.
There is some cause for concern: the last time investors were this bullish, the MSCI index sank 11 per cent in three months, according to data compiled by EPFR Global and Bloomberg.
"After all this money has flooded in, with everyone in love with them and all the euphoria surrounding them, it's hard to find fundamental value," said David Herro of Harris Associates, who was named international stock fund manager of the decade this year by Morningstar. "Growth in emerging markets is greatly helping the world, but you can overpay for it and that's what's happening," he said.
Mr Herro has reduced emerging-market stocks to about 4 per cent of holdings from more than 20 per cent in the late 1990s as inflation spurs China and India to raise interest rates, and Thailand and Brazil to boost taxes on international investors.
Jack Ablin, the chief investment officer at Harris Private Bank who said emerging-market stocks were too expensive a month before they peaked in 2007, favours shares of US companies that sell to developing nations.
"Yes, I believe that the emerging economies will outpace the developed world," said Mr Ablin. "But I still don't want to chase these valuations because a lot of optimism is priced in."
* with Bloomberg