Salient to Investors:

The MSCI Emerging Markets Index is up 22 percent since its October 2011 low versus the 33 percent advance for the MSCI World Index – the first time since 1998 they have underperformed during a global rally.

Bulls say emerging markets will lead the next stage of the global rally as record low interest rates send investors into riskier securities. Bears say the trend will continue as investors favor more transparent markets.

Michael Hartnett at Bank of America cut developing-nation shares for the first time in 6 months and raised positions in the SPX to the highest level since July. Morgan Stanley cut its estimate for gains in emerging-market equities and raised projections for US and Japanese shares.

Emerging market shares beat developed equities by an average 46 percent during bull markets since index data began in 1988.

Most developing market companies have missed analyst estimates for the last 5 quarters, while a majority of MSCI World companies beat estimates.

The only other bull market in which emerging stocks lagged was from September 1990 through July 1998, when US shares surged during the dot-com bubble and Asian equities were hurt by a financial crisis.

MSCI volatility was higher than the developed-country index during each rally by 30 percent on average, while emerging equities saw steeper declines and bigger price swings than developed shares during bear markets.

Scott Wren at Wells Fargo Advisors said investors want to own stocks more than they did a while ago but remain hesitant to take on risk.

Russ Koesterich at BlackRock said the US has been delivering.

Economists predict the US to grow 1.9 percent in 2013.

Byron Wien at Blackstone said emerging markets have flaws but have enormous economic momentum while developed markets are mature, and predicts emerging markets will lead gains in global stocks in 2013 with double-digit returns.

David Kelly at JPMorgan Funds said relative to Europe and Japan, emerging markets do not have the same indebtedness problem.  The IMF says developing nations’ government debt has declined to 34 percent of GDP from 52 percent a decade ago, versus 110 percent in developed countries.

The MSCI Emerging Markets Index is at 10 times 12-month profit estimates versus 13 times for the MSCI World, the widest gap since November 2008.

Rupal Bhansali at Ariel Investments says the risk of emerging markets is that their institutional frameworks are a work in progress.

Jason Hsu at Research Affiliates said inflation is preventing central banks in emerging markets from stimulating their economies as much as developed nations.

Andrew Milligan at Standard Life Investments sees QE continuing in advanced economies, which at the margin, will support developed rather than emerging markets.

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