Merrill Predicts 15%-20% 2008 EM Equity Return (1)

Equity investors are in for more modest returns next year, according to analysis from Merrill Lynch. “We remain bullish on EM equities, looking for another year of volatile but positive returns of around 15-20%,” says Merrill. “EM will account for 80 cents out of every $1 of global economic growth in the coming year,” it adds. LatAm equity funds are up more than 43% for 2007 so far and EM equity has jumped 34%, according to Lipper. “Equity leadership is likely to remain with the BRIC markets, resources, industrials (infrastructure) and financials (consumer). Relative value supports resource stocks in BRIC markets and domestic demand plays in non-BRIC markets,” says Merrill. Meanwhile in fixed income, in a high risk aversion scenario, Merrill Lynch tips intermediate bonds in Brazil, Mexico and Peru. For clients with risk appetite, the shop recommends Argentina, Colombia and Brazilian utilities and meatpackers. It also likes long inflation positions in Brazil with FX exposure, as well as curve steepeners in Mexico. Overall, Merrill says local debt markets are expensive to external debt.