Emerging Markets Set for Higher Returns

NEW YORK (TheStreet) -- Emerging markets have underperformed this year relative to fundamentals and on rising risk aversion. However, attractive valuations and recent selloffs could offer higher returns during the second half of 2010.

The Shanghai Composite Index has been the worst performer among the major emerging markets, declining around 26% year to date on concerns of government measures to slowdown the economy and the European debt crisis. The current price-to-earnings ratio of 14.9 is the lowest since early 2009 and enhances buying opportunities.

Rapid urbanization in China could boost domestic demand and increase the valuations of construction companies. China Housing & Land Development(CHLN) and Xinyuan Real Estate(XIN) are currently trading at attractive P/E multiples of 4.3 and 3.7, respectively.

India's BSE Index, trading at 17.1 times estimated profit, is the most expensive among the emerging market indices. In addition, the worsening short-term inflation rate following fuel price deregulation will likely trigger interest rate hikes, weighing heavily on the stock market. However, some fund managers expect that the Indian stock market may attract more foreign investments during the second half due to the country's economic growth story and declining fiscal deficit.

A probable rate hike by India's central bank will benefit ICICI Bank (IBN) and HDFC Bank (HDB), which may provide attractive returns during the second half. Tata Motors(TTM) will likely benefit from the robust demand for cars.

U.S.-listed Indian IT majors Infosys Technologies(INFY), Wipro(WIT) and Cognizant Technology Solutions(CTSH) are currently trading at price-to-earnings multiples of 24.5, 30.8, and 24.1, respectively, in comparison to Patni Computer's(PTI) 13.1 and iGate's(IGTE) 18.4.

Russia's MICEX Index has an attractive P/E ratio of 7.3. Although the index remained relatively flat, it is among the biggest gainers during the past year. Russia, with a debt-to-gross domestic product ratio of less than 7%, has the potential to show resilience to the current global economic environment.

Early this month, the International Monetary Fund raised its 2010 growth forecast for Russia to 4.25% from 4% on increased domestic consumption. In comparison, the risk factor for Eastern Europe markets will likely remain high over other emerging markets due the slowdown in the European economy.