Emerging Markets to Take Up Stock Rally Baton, Reuters Polls Show


The breakneck ascent of developed world stocks this year is probably over, but major emerging markets should gain strongly from here after a poor start, Reuters polls showed on Tuesday.

Since the start of the year, many of the world's top stock markets have hit their highest levels since the onset of the global financial crisis in 2008.

The U.S. S&P 500 index, for example, came close to its all-time high last week.

In many cases, the barnstorming rally bore no relation to actual economies and instead reflected the swathes of central bank cash flowing through the financial system.

(Read More: S&P Warns of Socially Explosive Situation in Euro Zone)

Still, the more than 450 analysts polled worldwide by Reuters suggested U.S. federal spending cuts, plus the threat that the euro zone' debt crisis might flare up again, will turn the rally into a modest upward trend for most big Western indexes.

That will allow emerging markets that have struggled so far this year to come to the fore.

"We expect the positive equity market environment to continue for now," said Gerhard Schwarz, head of equity strategy at Baader Bank, based near Munich.

"Even though political risks remain both in the U.S. and the euro zone, central bank action taken in 2012 has substantially reined in fears over systemic risk. This will aid a further recovery in business confidence."

The CBOE Volatility Index, known also as Wall Street's fear gauge, hit its lowest level since April 2007 on Friday, indicating equity investors are discounting concerns about a market pullback even as the S&P 500 nears its all-time high. The VIX is down 26 percent so far in 2013.

Still, events in Cyprus this week, after the conclusion of polling, brought a timely reminder of the threats to advancing stock markets.

Despite being one of the smallest economies in the European Union, the country is wavering on the edge of financial oblivion that could reverberate through the euro zone, knocking European shares lower.

If notoriously bullish equity strategists needed another warning that things often turn out for the worse unexpectedly, it's the fact Indian, Chinese, Korean and Brazilian shares are all in the red so far this year.

Even so, they expect these markets will start delivering strong gains shortly.

Chief among them will be Sao Paulo's Bovespa, which has endured a dismal 2013 so far, falling more than 6 percent.

It is expected to rise more than 18 percent from here to the end of 2013, with Shanghai and Tokyo stocks not far behind.

Tokyo Taking Off

Japan's Nikkei has by far been the best performer among the poll's 20 indexes, recording a 17.6 percent gain up to March 18 this year, and fuelled by government attempts to reflate the economy.

If accurate, the poll suggests the Nikkei would finish the year a stellar 35 percent higher compared with its 2012 close.

(Read More: Behind Nikkei's Gains — It's Not Just the Weak Yen)

"If you waited until the economy recovers, you will be 'driving while looking at the rear-view mirror'," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Conversely, the gains predicted for Brazilian shares can be put down to reduced government intervention, after its involvement in private telecoms and utilities sectors spooked investors, leading to the Bovespa's decline so far this year.

Shanghai's Composite Index should also gain heartily from here, around 16 percent, after likewise suffering a decline so far this year, helped by signs the world's No.2 economy is starting to pick up.

Mexican, Russian, Indian and Hong Kong shares are expected to post double-digit gains from now until the year's end.

Hitting Record Highs

Analysts expect U.S., German and British stocks to fare the worst from here, adding just a handful of percentage points each until the end of the year.

Still, that would mean the S&P 500 would hit a new record high, even if it gains just three percent until the end of the year as the poll predicts.

(Read More: China Is a 'Huge, Huge Trade': FTSE CEO)

"A correction along the way cannot be ruled out, but simply because we are at record territory does not mean one is inevitable," said David Joy, chief market strategist at Ameriprise Financial in Boston.

Similarly, Germany's DAX looks like it will surpass its all-time high later this year, even with tepid single-digit gains from now.

Not all analysts were very bullish about the next nine months, however.

"Ultimately the excessive debt overhanging developed economies will have to be written off and this will be horrific and deflationary," said David Morrison, market strategist at GFT Global in London.

"Expectations for corporate earnings are currently too high and will soon be revised down sharply on profit warnings as consumers hunker down. This should put a lid on rallies going into 2012."