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Investors fall back in love with emerging market equities

Bullish investors – such as Jim O’Neill, chairman of Goldman Sachs Asset Management – reckon strong earnings growth will ensure emerging stocks can repeat their stellar performance in 2013. But with valuations less attractive than last year, only the smart money will generate outsized returns, with China and Russia looking particularly attractive, analysts conclude.

Like true love, cricket and – depending on your taste in music – a Kraftwerk box-set, emerging market (EM) equities, on a long-term investment horizon, are a gift that just keeps on giving. In 2012, the fourth full calendar year since the onset of the financial crisis, this love story stayed on script. While developed-market stocks rose, emerging-market securities soared, handing investors a return of nearly 19% in US dollar terms, based on the MSCI EM Index.

With a few exceptions – notably Brazil, which handed investors a paltry country-weighted return of less than 1% – 2012 was another crackerjack year for the growth-fuelled emerging world.

On a regional basis, returns from emerging Asia stocks – which make up 60% of the index’s market cap – topped 20%, as did equities from emerging Europe, Middle East and Africa (EMEA), according to Thomson Datastream.

Thanks to massive underperformance in 2011 – amid the despair of the eurozone crisis – EMs under-performed their developed peers in the risk-off environment, creating big pockets of value in 2012.

Turkey, for example, which makes up just 1.7% of the MSCI EM Equity Index, delivered returns of more than 60% last year.

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