By Sujata Rao
LONDON, Nov 25 (Reuters) - Investment firm Blackrock is
betting on Russia as the best way to position for a global
economic recovery, while predicting emerging equities will build
on this year's rally with another 20-30 percent upside in 2010.
Blackrock's 175 million-pound emerging markets fund, managed
by Daniel Tubbs, has Russia as its biggest overweight, followed
by fellow-BRIC Brazil. It has gone underweight China and India,
following the large rallies in these markets earlier this year.
Tubbs said valuations in Russia and central Europe do not
reflect the improving growth picture for these economies
--Russian stocks, despite a 120 percent rally this year are
trading 7.5 times 2010 earnings, about half the level of China.
The fund's benchmark, the MSCI emerging index <.MSCIEF>
trades 13 times 2010 earnings.
"Our largest overweight is Russia. The Russian market is a
proxy for the oil price and the expectation is oil prices will
rise. Within Russia we are overweight the energy sector."
The economy should rebound 5-6 percent in 2010 from a fall
of up to 8.5 percent in 2009, inflation is easing, industrial
output is rising and interest rates are down, he noted.
"From that perspective we like Russia. There could be more
rate cuts to come while other (emerging) countries are thinking
of the next (rate) moves as being up not down," he added.
Tubbs has oil firm Rosneft <ROSN.MM> in his top 10 picks as
he expects the firm to gain from plans for a preferential tax
regime for oil firms operating in east Siberia.
Tubbs also likes central Europe, which has lagged broader
emerging markets' performance due to banking problems, current
account deficits and reliance on Western Europe for exports.
The Prague and Warsaw markets have risen just 30 percent
year-to-date versus over 70 percent gains for the MSCIEF.
"In (Poland, Hungary and Czech Republic) where we had zero
exposure until recently, we now have substantial exposure. Those
are a few of the countries which offer considerable upside from
here," Tubbs said. "They are laggards compared with others."
Tubbs is underweight Asia and most of South America but has
some holdings in the frontier markets of Qatar and UAE which he
says still trade cheaply and have not recovered from 2008 falls.
MORE GAINS IN 2010
Starting March, when central banks and governments around
the world turned on the liquidity taps, emerging equities have
enjoyed a huge influx of cash, the rally deepening as it became
clear many emerging economies are well on the road to recovery.
While currency appreciation generated by such flows is
increasingly prompting countries to impose capital controls,
Tubbs said the measures will not hurt markets significantly.
He favours domestic consumption stocks, financials and
industrials, which are not hurt by stronger currencies.
"Credit penetration levels are low, potential to grow
further is immense. In Indonesia for instance, two-thirds of the
people don't have a bank account so emerging financials are a
great place to be for investors," he added.
This year's 70 percent-plus gains have boosted valuations
but Tubbs says they are by no means expensive.
"We won't be surprised to see 20-30 percent upside next
year," he said. "Valuations are still at a discount to MSCI
world stocks <.MIWD00000PUS> even though (GDP) growth and
earnings growth in the emerging world will significantly
outstrip the developed world."
He said that while some volatility is likely as countries
around the world start withdrawing stimulus and raising interest
rates, investors will likely use pullbacks to add positions.
(Editing by Matthew Jones)
((sujata.rao@thomsonreuters.com; +44 207 542 6176; Reuters
Messaging: sujata.rao.reuters.com@reuters.net))
