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. Last Updated: 07/27/2016

Strategists Still Cheer Emerging Markets

LONDON -- The world's largest sovereign debt default in Argentina may be the trigger for investment in emerging equity and debt as it removes the main factor casting a pall over developing markets, strategists and analysts say.

Emerging equity markets, out of fashion since the Asian crisis of 1997, have substantially outperformed developed markets over the past year. This year that relative outperformance could turn to absolute gains, with some analysts seeing prices rising by as much as 100 percent.

"You are looking at a potential double on this asset class to get back to normalized levels," said Tim Love, global emerging-markets strategist at Deutsche Bank.

In 2001, emerging equities as measured by the International Finance Corp. Investable Composite Index lost just 1 percent, massively outperforming developed markets, where the Standard & Poor's 500, a broad gauge of the U.S. market, had its worst performance since 1974 with a loss of 13 percent.

Love said it was a matter of time before global fund managers recognized they were getting killed on return and performance measures by not investing in emerging equities.

Any move into emerging markets would come first from dedicated funds, followed by local investors and then the large players that have discretion to invest globally.

Reversion to a market neutral weight would release $15 billion $18 billion for investment in emerging-market equities, he said.

Despite the saga of Argentina's devaluation and default, which has grabbed headlines for most of the past year, the credit picture in emerging markets overall is better than before the Asian financial crisis erupted in 1997.

There are now six countries that are rated investment grade by Standard & Poor's compared with just four in 1997.

Argentina's travails, which saw a 66.85 percent drop in its share of the emerging-market debt indexes, did not spill over.

The JPMorgan Emerging Market Bond Index Plus, excluding Argentina, produced a gain in dollar terms of 19.8 percent last year after 18.3 percent in 2000.

Even as Argentina implodes economically and socially, neighboring Brazil was able Monday to issue $1.25 billion of 10-year bonds. There was demand of $2.1 billion for the paper.

Mexico managed to up a $1 billion offer to $1.5 billion on the same day.

"There has been a huge build-up of liquidity among emerging-debt funds. When Argentina does go to the wall, there will be money flows," said Paul Luke, strategist at emerging markets online brokerage Brunswick Direct.

Some analysts said investors would actively distinguish between credits, favoring those which have a convergence theme, such as East European countries on the road to European Union membership and Mexico, which is converging with the United States.

"The policy failure in Argentina -- which has never been in the converging market category -- is likely to reinforce the difference in investors' perceptions between converging and other emerging markets in respect of bond spreads and as a potential destination for scarce foreign direct investment," said Philip Poole, head of emerging research at ING Barings.