By Sujata Rao
LONDON, Dec 7 (Reuters) - HSBC Global Asset Management said it had Russia as its biggest overweight position in emerging markets, predicting 2011 returns would outstrip the 10-30 percent gains it expects from broader emerging equities.
Nick Timberlake, HSBC's head of emerging market equities, told the Reuters 2011 Investment Outlook Summit on Tuesday that the fund is underweight India and China and neutral on Brazil but likes South Korea and Turkey.
"We have our most significant overweight position in Russia today. Russia is our favourite market for next year," Timberlake said at the summit, held at the Reuters office in London.
"There's a strong valuation case."
He noted Russian stocks trade around 6.3 times forward 12-month earnings, compared with a five-year average of 9 times. The Moscow stock market has posted gains of almost 20 percent year-to-date, boosted by FIFA's decision to award the 2018 soccer World Cup to Russia, a rise in oil prices and Pepsico's $5.8 billion acquisition of Wimm-Bill-Dann.
The market may rise further as Russia is expected now to finally join the World Trade Organisation next year, a deal that could add up to 3.3 percent to the economy. Timberlake noted the price paid by Pepsi represented a 35 percent premium to where Wimm-Bill-Dann traded two days ago.
"This gives an idea of the value hidden in the market."
Timberlake, who manages $10 billion, also predicted overall emerging equity markets to do better next year than in 2010. They are up around 14.5 percent year to date.
"What drives the market up is: earnings, profit growth and valuations. Consensus for earnings growth is 16 percent next year ... Valuations are somewhere around average of the history," Timberlake said.
"(Expect) continued re-rating of the asset class. A 0-10 percent re-rating should be perfectly reasonable so you get 10-30 percent returns. "I'd go for around 20 percent returns."
Investors who spoke earlier at the summit also forecast the equities bullrun to continue as ample cash levels are deployed for mergers and acquisitions, dividends and capital expenditure.
Aside from Russia however, Timberlake is cautious on Brazil, India and China -- the other BRICs.
He is underweight China but likes Chinese financials, which have been shunned this year by investors on worries Beijing will continue to rein in loan growth, especially in housing.
But recapitalisation has already taken place and Chinese growth is not expected to slow significantly, Timberlake said.
"So (banks) are well placed to stimulate the economy next year. There has been a bit of consolidation and that's an opportunity to add again for 2011," he added, noting the shares were also attractively valued at less than two times book value.
While Indian stocks have performed reasonably this year, with returns of around 14 percent, Timberlake said the market was too expensive, trading around 17 times forward earnings. That would make it almost three times pricier than Russia.
"India is the market we are most cautious about from a valuation point of view. Brazil too looks very expensive relative to history," he said.
The other markets Timberlake tips to outperform in 2011 are South Korea and Turkey, with the latter benefiting from strong growth and low inflation, though valuations are not cheap.
South Korea, like many other emerging markets, should benefit from the China effect, he said, citing engineering and tech stocks as posed to make gains.
"There's no inflation problem in Korea and there are many bottom-up investment opportunities. Financial companies are attractive, many of them are trading book to value and generally generating double digit returns," Timberlake said.
In terms of headwinds, he noted the euro zone crisis and the growing risk of trade protectionism in the West as the external risks. Within emerging markets, inflation is on the rise and China could be a key test.
"If you get an inflationary spike in China how would authorities react to that, it could create hard landing. It's not our central case but it's a risk," Timberlake said.
He named geo-politics as another factor which could derail the rally in so-called riskier assets like emerging markets, with North Korea and Iran possible risks for 2011.
"Iran is the key issue," he said. "It's an unquantifiable risk that's been sitting there for a while."
(Additional reporting by Natsuko Waki; Editing by Jon Loades-Carter)