Emerging markets have their mojo back

@lamonicabuzz February 10, 2012: 12:34 PM ET
Chinese stocks are on fire in 2012 on hopes of lower rates and a global recovery. Markets in Brazil and India have surged too.

Chinese stocks are on fire in 2012 on hopes of lower rates and a global recovery. Markets in Brazil and India have surged too. Click chart for more data.

NEW YORK (CNNMoney) -- Stocks are soaring this year. Everywhere. And if you think the rally has been big in the U.S., just check out emerging markets.

Brazil's Bovespa (IBOV) has sambaed to the tune of a 13.5% gain so far in 2012, compared to the relatively paltry (I kid) 5.5% gain for the Dow (INDU). In India, the Mumbai Sensex (SENSEX) is up 15%.

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China's the "laggard" of the emerging market club. Hong Kong's Hang Seng (HSI) is up "just" 7% year-to-date while the Shanghai Composite (SHCOMP) is up about 12.8%.

All emerging markets took it on the chin last year. Concerns about inflation and asset bubbles as well as worries about possible spillover from the European sovereign debt crisis hit Brazil and China in particular.

But the slowdown in the breakneck growth rates for emerging markets is actually, in somewhat perverse fashion, helping lift stocks this year.

Why? Much of the move may simply be a case of traders chasing last year's big losers. You're seeing the same phenomenon in the U.S. with bank stocks.

"Emerging markets are catching up after the drop last year. Investors are more willing to embrace risk again," said Frances Hudson, global thematic strategist with Standard Life Investments in Edinburgh, Scotland.

But there are also growing hopes that the central banks in Brazil, China and India may do their best Ben Bernanke and Mario Draghi impersonations and start loosening monetary policy.

China: Fast food nation. Too fast economy?

China has already relaxed conditions a bit. Its central bank cut the reserve requirement ratio for banks last November for the first time since 2008. Now there are hopes that the People's Bank of China will also soon lower interest rates, which currently stand at 6.56%

Brazil's Copom lowered interest rates at its last meeting in January. That was the fourth consecutive rate cut. But even after all this easing, rates still remain at 10.5%. So there is plenty of room to cut.

And in India, there is growing pressure on its central bank to join the Great Global Easing and finally lower rates. The Reserve Bank of India last raised rates in October to 8.5%. That was the 13th rate hike since March of 2010.

Sure, inflation did pick up in January in China. That will be a concern if the trend continues. But it's highly likely that the increase in consumer prices was due to the Lunar New Year celebrations last month. It's probably a temporary blip.

"Inflation is no longer an immediate concern in major emerging markets," Hudson said.

Of course, investors probably need to be a little more wary of the emerging markets now that they are so hot again.

The rush back into emerging markets in such a short period of time has been nothing short of spectacular.

Fund tracking firm EPFR Global reported Friday that inflows into emerging market stock funds were at their highest level in more than a year last week. And inflows into emerging market bond funds hit a record high.

Investing overseas: Finding the right balance

Investors may have fallen in love with risk again. But they may be doing so at the risk of ignoring risk. (Hope that's not too convoluted!)

The biggest risk by far is that Europe remains a hot mess -- to use a favorite "Project Runway" term.

China would probably suffer the most if Greece is unable to avoid default, an event that could trigger another banking crisis and a much deeper European recession. The EU is China's biggest trading partner.

Even if Brazil, India and China quickly slashed interest rates to stop the bleeding, easy money policies can only do so much. Just ask the Fed.

No market would be immune from a global economic slowdown. The notion of decoupling is a myth that needs to be put to rest.

"Emerging markets are going to behave based on what happens to global growth," said Subodh Kumar, an investment strategist with Subodh Kumar & Associates in Toronto. "Even if growth is strong in China, Brazil and India, stocks are going to react to what happens in the U.S. and Europe."

Best of StockTwits and reader comment of the week. LinkedIn (LNKD) isn't Groupon (GRPN). Thank heavens. The social network for professionals reported a better-than-expected profit and tts stock surged 15% Friday.

WallStreetD: #LinkedIn is an #HR 2.0 company. 50% of its revenues in Q1 came from Hiring Solutions $LNKD

bradloncar: It's a good sign for $LNKD that revs from enhanced accounts grew even faster than advertising. Says a lot about the quality of the product.

One of the main reasons I think that most social media sites may be overvalued is because there is such a heavy reliance on advertising. That will be the case with Facebook too when it goes public. LinkedIn has a more diverse business model.

KidDynamiteBlog: Am I making the "you're not the customer, you're the product" error when hating $LNKD stock? customers are companies paying to see our info.

Good point. But is LinkedIn doing anything different than other social media sites? We all worry about privacy, but we willingly put personal information on social networks. Our personal details are increasingly the product for advertisers. But with LinkedIn, at least there is the potential for a company that is paying to see your info to offer you a job.

Finally. this week's top reader comment goes to a guy who seems to be even more of a walking IMDB of movie and TV quotes than I am. In fact, the guy's Twitter handle and profile photo is an homage to my favorite show of 2011: "Homeland."

Matt B, aka @SgtNickBrody, paraphrased "The Usual Suspects" in a tweet describing the occasionally cryptic comments from the president of the ECB.

"The greatest trick Mario Draghi ever pulled was convincing the ECB he didn't exist," he tweeted.

And like that, poof. You're the winner. By the way, please don't kill Carrie in Season 2!

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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