The stocks markets of the emerging countries took a strong beating last year, as the foreign investors withdrew their money in search of safer assets, in view of fears of a severe global slowdown. Emerging market equities lost nearly 21% in 2011; the downslide came mainly in the second half of the year.

But look at the 2012 year-to-date returns of some of these countries:

Country

Stock Index

YTD Return*

Russia

RTS Index

14.1%

Argentina

Merval

13.2%

India

Bombay Sensex

11.2%

Brazil

Sao Paulo Bovespa

11.1%

Philippines

Manila Composite

6.7%

China

Shanghai Composite

4.2%

*source: WSJ

Clearly, as the global investors realized that US will grow moderately this year while Europe may well be able to avoid a meltdown and China will probably have a soft-landing, their risk appetite began to grow.

Some of the emerging world currencies like Mexican peso, Brazilian real, Indian rupee and Russian ruble also had a spectacular start to the year, bouncing back nicely from sharp decline in recent months.

Coupled with the appreciation of the local currencies against the dollar, the gains for international investors have been even greater, (~16% in Brazil and India). The dollar-based MSCI index of emerging market equities is up 11.30% year-to-date.

Apart from the improvement in the risk appetite, improving outlook for these economies is also giving a boost to the stock markets.

Many of the central banks of these countries were on a tightening path in 2011 in order to fight inflation, but now they are embarking on an easing path, which will provide support to the economies. In its latest World Economic Outlook Update, the IMF projects that the emerging economies will grow 5.4% in 2012, versus 1.2% growth for the developed economies.

Lastly, sell-off in the second half of 2011 presented some interesting buying opportunities.

While I do not really believe that 2012 will be “The Year” of the emerging markets, as these economies are still quite dependent on the developed world, there is a strong chance that these markets will outperform in 2012, as long as there is no catastrophic news from Europe. As such, it appears to be the right time to add some exposure to these markets.

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Zacks Investment Research