Merrill Lynch - The second half of the bull

In the first half of the bull market (Oct 2002 to May 2006), global growth was strong, led by the United States. A falling US dollar boosted commodity prices and liquidity (as appreciating currencies in EM allowed interest rates to fall). EPS in EM rose sharply, and asset price returns were very strong with deep value commodity-sensitive sectors such as energy leading the way. In fact, the four global cyclical sectors (energy, materials, tech and consumer discretionary) contributed 56% of the total returns in all emerging markets between Oct 2002 and May 2006.

In the second half of the bull market (which we believe began in June 2006), emerging economies are likely to spend more of their savings to fund strong domestic economic activity. EPS should become less dependent on G7 demand. Domestic demand themes such as the consumer and infrastructure spending should wrestle leadership within the equity market away from the commodity cyclical and export groups. Returns should be positive, just less dramatically so, and domestic demand stocks should assume leadership. Micro drivers and the ability to deliver EPS likely will grow in importance, as should leverage in the corporate sector

Merrill Lynch is however Underweight on India as it is an Expensive GEM market with inflation, CB tightening. A Cheaper market would change their view.