Emerging Market Stocks to Outperform in 2012, Says BlackRock

Stocks in emerging economies such as China and Indonesia have underperformed this year in comparison to some developed markets, but the world’s largest asset manager, BlackRock, says they are set to take off in the second half amid higher volatility in the United States and Europe.

An investor smiles at a stock exchange hall on August 10, 2011 in Shenyang, Liaoning Province of China.
ChinaFotoPress | Getty Images
An investor smiles at a stock exchange hall on August 10, 2011 in Shenyang, Liaoning Province of China.

The Shanghai Composite Index has gained 0.8 percent, while the Jakarta Composite Index has added 2.95 percent this year, compared to a 5.9 percent increase in the S&P 500 and a 5.61 percent gain in Germany’s DAX.

But BlackRock is still sticking to its forecast that emerging market stocks will outperform their Western peers in 2012. Less volatility, stronger economic growth, slowing inflation and cheaper valuations are going to push emerging market equities higher, BlackRock said in a report published Wednesday.

“Most of the larger emerging markets have witnessed a significant deceleration in inflation over the past six months,” Russ Koesterich, Managing Director of BlackRock, wrote in the report. “As inflation falls, multiples in emerging markets typically rise at a faster rate than for a similar drop in developed markets.”

As of late May, the MSCI Emerging Markets Index was trading at about 11 times forward 2012 earnings, which is about 20 percent less than that of the MSCI World Index, according to the report. Historically, whenever emerging markets trade at a 20 percent or more discount, they tend to outperform over a one-year horizon, the report added.

BlackRock recommends buying high-dividend stocks and bonds in Brazil, China, Indonesia and Taiwan.

Destination Wealth Management, a California-based advisory and investment firm, says investors should buy some emerging market equities to take advantage of the burgeoning middle class, as the debt problems in the U.S. and Europe will crimp growth there.

“The Shanghai Index has been destroyed relative to 2007, and that’s why we just bought China for the first time in quite some time,” Michael Yoshikami, CEO of Destination, told CNBC Asia’s “Squawk Box.” “Maybe we are not going in at the lowest, but we are going in at a fairly low point right now.”

Pu Yonghao, UBS Wealth Management’s Chief Investment Officer for the Asia Pacific region, expects the U.S. and Europe to remain volatile even if they will eke out some growth. He favors Asian stocks because of pro-growth policies that many governments have started to adopt and low valuations.

“Stock markets are trading at a relative discount, so it makes sense that you look at the opportunities to pick up some companies with good cash flow, good dividend yield,” Pu said.

- By CNBC's Jean Chua.