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) -- September has been a great month so far for equities. But some emerging markets have been on fire all year.

Indonesia has been among the highest performing markets in 2010, delivering a return of 40% in dollar terms. Philippines, Thailand, Malaysia and India have been other strong markets in the Asian region; India's Sensex has jumped 10% in the past month. In Latin America, Chile has topped returns, delivering returns of about 35% in 2010 on the back of strong demand for copper.

With fewer investment opportunities in the U.S. and Europe and with the dollar weakening against many Asian currencies, smart money is chasing emerging markets, as evident in recent fund flow data. Flows into emerging market equity funds hit a seven-week high of $3.38 billion in the week ended September 22, according to EPFR Global, which tracks fund flow and asset allocation data.

>>How To Play Emerging Markets

Investor appetite for stocks operating in these markets is strong, as evident from the success of the $70-billion secondary equity offering by Brazilian oil major


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. Emerging market ADRs such as Chinese internet search-engine


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have doubled over the year.

Valuations are at fair levels for most of these developing markets, and on parity with developed markets, when historically they have traded at a discount. Analysts say the valuations are, however, still not too expensive considering the relative strengths of these economies and their earnings potential.

James Dailey of Team Asset Strategy is most bullish on Latin America, especially on Brazil and Peru. "They have been running their countries with the lessons learned from the eighties and nineties and they have been very responsible stewards of their relative prosperity in recent years," he said.


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To learn more on what drives Latin America, click on the audio clip below for an excerpt from Dailey's interview with TheStreet.


Australia may not be an emerging market but it stands to gain from the boom in China, says Chad Deakins, who runs RidgeWorth International Equity Fund and has an 8% exposure to Down Under. "The Chinese economy has been one of export but is now turning into one of consumption. They are doing a lot of construction, buying lots of material and they need lots of food. These are two things that Australia has lots of ... they have land and lots of iron ore," he said.

While China looks poised to make a soft landing, the portfolio managers say better opportunities lie outside of China. Christian Wagner of Longview Capital Management says he prefers to focus on markets that have relative strengths vis-a-vis their regional indices. His top picks are India, Chile and Mexico.

While there are several emerging markets that clearly look attractive, which emerging market do you think will outperform in the next year? Vote in our poll.

-- Written by Shanthi Venkataraman in New York

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