On the valuation side, EM’s forward price to earnings multiple of 9.5 times is now the second lowest of the major equity regions … our base case forecast for emerging economies to grow GDP by 5.7 per cent in 2012 versus just 1.2 per cent in the G10. Hence, we have recently advised clients to adopt a fully invested stance for the first time since October 2008. There is around 30 per cent upside to our scenario weighted Target Price for 2012.
China’s recent surprise 50bps reduction in its Reserve Requirement Ratio (RRR) may act as a catalyst for better market performance … in 2008, the easing of RRR restrictions was followed by an acceleration in the growth rate of bank lending and strong performance from MSCI China and emerging market equities more generally.
… markets will be volatile next year because of uncertainty about policies in the eurozone and elsewhere, fund managers’ desire to avoid losses in difficult times, and likely swings in the oil price. All this will disturb EM equities more than DM.