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Emerging Market Stock Performance Overtaken by Developed Countries

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Stocks in developed countries are rising the most since 1998 while emerging markets slump, a sign the United States is returning to its role as the engine of world growth aided by a recovery in Europe.

Bloomberg reports the MSCI World Index of equities in 24 countries rose 6.1% for 2011 through Monday, the best annual start in 13 years, and the MSCI Emerging Markets Index of shares in nations such as Brazil, Russia, India and China lost 2.7%. A Morgan Stanley gauge of stocks such as Archer Daniels Midland Co. and Deere & Co. meant to rally when inflation expectations match Federal Reserve targets added 46% since August, almost double the Standard & Poor’s 500 Index.

The news service notes that while emerging-market equities beat developed countries every year except 2008 in the past decade, they’re falling now as Brazil, Russia, India and China battle inflation. Thornburg Investment Management Inc. expects bigger gains from developed-market equities after German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged to prevent the breakup of the euro and the Fed began buying $600 billion in Treasuries to spur growth.

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“You’ve got more willingness to take risk with equities in developed markets,” William Fries, who runs the $26.7 billion Thornburg International Value Fund, told Bloomberg. “At the beginning of the year, the world kind of turned upside down. There wasn’t a great deal of money flowing into developed markets over the last couple of years, and that’s starting to change.”

The last time the developed-nation index won by this much to start a year was 1995. It went on to gain 47% in the next three years, and the emerging-nation gauge fell 4.2% through the end of 1997 after the Asian financial crisis.

While the MSCI World trailed the gauge of emerging nations by an average of 16 percentage points annually since 2001, it held up better during the financial crisis, losing 42% versus 54% for emerging markets in 2008.