Emerging giants reclaim centre stage

Bubble fears and the sovereign debt crisis forced the Bric nations into the wings as the smaller emerging markets hogged the limelight. But well-chosen Bric stocks will perform well in 2011.

The second chart shows estimated earnings growth in 2011 plotted against estimated P/E valuation in 2011, with the size of the bubble indicating the market capitalisation of the country. It is easy to see the high premium at which stocks in the wider emerging markets are trading in relation to their potential over 2011 and for the next five years. The wider emerging markets bubbles are inside the red circle on the higher P/E side of the graph, while the Bric countries are placed inside the yellow bubble with lower P/E valuations.

With a looming bear market in bonds and continued refinancing needed of sovereign debt and for many large financial institutions, 2011 could prove volatile. The best place to invest will be equities, but crucially those equities that are able to withstand turbulent markets and deliver growth. These are most likely to be large-cap stocks in developed markets as well as the largest and most liquid emerging markets; those in the Brics. These stocks offer the most attractive valuations in the emerging markets universe, with low risk and strong potential returns.

This year will deliver some surprises, but those investors who invest prudently in the Bric countries should continue to benefit from the impressive long-term growth story.