Analysis: Emerging markets? So last year, some investors say

LONDON (Reuters) – Equity investors take diplomatic communication: the emerging markets bet which paid off so handsomely last year may own run its course for the time being.

For the year forward, exposure to surprisingly strong domestic European growth may prove more profitable than investing in markets such as China, still fast growing moreover which could be affected negatively by factors such as rising over-enlargement .

Shares in plenty of companies heavily exposed to emerging markets outperformed latest year, but some investors have already started to seek cheaper valuations in the midst of stocks which stand to benefit from domestic growth.

“The emerging market story has got a long, long way to go … (on the other hand) in the short term, some of the valuations might be a trivial bit generous. With the prospects of recovery in Europe, it’s going to exist less of a short-term theme,” a London-based foundation manager, who declined to be identified, said.

“It’s to a greater degree likely to be companies which are poised for the recovery in Europe,” he afore~, adding he favors European banks, among them Deutsche Bank.

Picking the most judicious domestic plays isn’t necessarily easy.

Although not all companies unfold how much of their sales come from emerging markets, Thomson Reuters given conditions shows in 2010 the performance of a portfolio of European public securities with high foreign sales outpaced a basket of domestic-focused firms through 23 percent.

However, so far this year the domestic-centric portfolio has outpaced the overseas exposed basket ~ means of 4.8 percent.

The change in sentiment was the result of a salmagundi of Europe’s improved economic outlook and concerns about over-enlargement and lower returns in emerging markets.

Germany, Europe’s biggest established order, on Wednesday lifted its 2011 economic growth forecast to 2.3 percent from 1.8 percent, though stronger than expected Chinese fourth-quarter GDP raised concerns of farther monetary tightening in the world’s second-biggest economy.

In stipulations of valuations, companies relying on domestic sales may offer better precise signification. The domestic-focused basket of European companies carries a one-year trailing cost-to-earnings of 12.7 times versus the portfolio of strange exposed stocks’s 18.7.

INFLATION FEARS

“Germany is obviously recovering further. At some point, it might become less dramatic between domestic and the emerging place of traffic plays. The emerging market plays have gone up quite strong,” afore~ Nick Nelson, equity strategist at UBS.

According to Goldman Sachs, companies by relatively high exposure to the country’s consumers included Axel Springer, Fielmann, Tomra Systems, Suedzucker, Praktiker, Gagfah, Metro and ProSiebenSat1. It also highlights Volkswagen, which has high domestic as well as emerging emporium exposure.

Some investors have cashed in gains from shares in companies by large developing country sales after their outperformance in 2010, as concerns throughout inflation in emerging economies grew.