As we wrap up our analyst outlooks for 2010 we’re beginning to see a number of very similar perspectives.  One of the most obvious of these outlooks is the extreme optimism with regards to emerging markets.  JP Morgan recently released their expectation for a full 30% rise in emerging market in 2010 and now analysts at Merrill are expecting a similar outlook.   Merrill sees very strong emerging market equity growth of 20%+ due to 4 primary trends.  Despite my natural urge to view the consensus from a contrarian perspective Merrill points out some valid fundamental reasons for emerging market outperformance:

• Additional growth boost as developed economies recover and increase their demand for overseas exports. This should support growth in Russia, Korea and Mexico, and should add to the robust growth picture.

• Theme number two is a higher interest rate environment. We believe emerging markets’ central banks will lead the global economy in raising interest rates in the first half of 2010. Such moves will likely be supportive for emerging market currencies. India, Indonesia, Korea, Turkey and Mexico are forecast to raise interest rates early next year.

• Theme number three is a pick-up in investment activity in emerging economies. This renewed spending should lead to higher productivity, along with a rise in debt levels. In fact, we believe 2010 will be about debt issuance as Emerging Markets use their excess savings to finance domestic projects. We estimate emerging markets’ excess savings at 4% of GDP for 2009, we expect these savings to add to the growth story in 2010.

• The fourth and final theme is market volatility. Investors may increase their appetite for emerging market assets as growth continues to catch up. But, higher debt levels and higher interest rates could trigger greater market volatility between the second and third quarter of 2010.

Source: Bank of America Merrill Lynch

Cullen Roche

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