SAN FRANCISCO (MarketWatch) Emerging markets didnt weather 2011 quite as well as many predicted at the start of the

e year, but theyre still likely to impress in the new year. The iShares MSCI Emerging Markets index fund (US:EEM) is ready to post a loss of 20% for the year after hefty gains in the previous two years. Most stock markets in the emerging-markets countries didnt fare well either. Year to date in Asia, Chinas Shanghai SE Composite (CN:000001) and Indias Sensex (IN:1) have each lost more than 20% and South Koreas Kospi (KR:0100) has fallen 11%, while the Philippines PSE PSEi has added 4.1%. Elsewhere, Chiles IPSA (CL:IPSA) was down 15% year to date and Egypts EGX30 (XX:EGX30) sank 49%, while Venezuelas CSE General was a standout, up 79% year to date as of Thursday. Economic growth in emerging markets will likely outshine the rest of the world in 2012, given the weak growth prospects beleaguered developed nations currently are facing, portfolio managers at Mirae Asset Global Investments stated in a recent outlook report. Equity valuations look attractive across the emerging markets, as price-to-earnings and price-to-book-value ratios remain below historic long-term averages, they said. And we anticipate modest inflows to emerging market funds, once the developed market turmoil is contained and investor risk appetite returns to pre-crisis levels. Matt Lasov, director of global research at Frontier Strategy Group, said the emerging markets performance in 2012 depends on their relationship to the euro zone. The euro zone is in a recession that is likely to get worse, Lasov said. We see a two in three chance that there is a breakup of the euro zone in 2012 most likely Greece leaving. And success for emerging markets will be determined by linkages to the euro zone, he said. The clear outperformers in the short term are India, Indonesia, and Sub-Saharan Africa, according to a research note from Frontier Strategy Group, referring to those markets as having low linkage to the euro zone. These markets are characterized by rapidly growing domestic demand and diversifying economies that are creating middle class growth and they have limited trade relationships with Europe. The Middle East and Latin America are linked to Europe because of trading in commodities, the note said, referring to these markets as having medium linkage to the euro zone. Reduced European demand for oil will impact state revenues, but most markets have more than enough reserves to weather a crisis. Russia, meanwhile, is positioned to be the biggest underperformer, the note said. Oil exports to Europe are driving Russia GDP growth more than ever before, and

as oil prices fall below the $110 per barrel built into the Russian budget, Russia will enter deficit.