Key valuation and sentiment indicators reached levels on October 4, 2011, that were not much above the October 2008 extremes. They back-test well for significant gains 6-12 months later. Recent events in EU give a second chance to buy.

Forward P/E reached 7.8x (lowest 99th percentile over 20 yrs and versus 5.7x at the trough on 27th Oct 2008) and is now 9.6x

Historical P/B reached 1.34x (lowest 93rd percentile over 20 yrs and versus 1.15x at the trough in Oct 2008) and is now 1.57x

Equity risk premium to UST 10 yr reached 1155 bps (highest 99th percentile over 20 yrs and versus 1176 bps at the trough in Oct 2008) and is now 970bps

EM to perform well versus DM: Our conviction that EM equity will start to outperform DM equity again is high. In our base case, we expect EM ROE to remain at more than a 20% premium to DM through end-2012, yet EM currently trades at a forward P/E discount to DM of more than 12% and trailing P/B discount of 1.6%.

EM particularly cheap versus S&P 500. MSCI EM is trading at an 18% discount to the S&P500 on consensus 12-month forward P/E and 12% on Shiller P/E.

David Fuller's view While I think we should call these growth markets (GM) rather than emerging markets (EM), this report may interest global investors.

For perspective, have a look at the graphic on page 4 showing the MSCI EM outperformance of 231 percent relative to MSCI World since December 1989. While we cannot assume that this will be repeated over the next twenty years or more, my impression is that the outlook has improved for EM relative to DM economies, for at least the next few years.

Nevertheless, with stock markets we buy companies, not the economies, as I have often pointed out. Currently, many of the best performing shares are Autonomies - the big, multinational firms leveraged to global GDP growth. A number of these have attractive yields and dividend aristocrats are among them, as you will know from Eoin's frequent share reviews.

However, with more of the EM (I will refer to them as GM for the rest of this review) countries signalling that they are shifting to more accommodative monetary policies, their stock market performance is likely to improve.

We are already seeing that with some of the ASEAN sector. For instance, Indonesia and The Philippines, although still rangebound, are currently well above their October lows and saw very little pullback last month. Malaysia is only slightly behind the two ASEAN leaders. Thailand continues to rally from its October lows despite horrendous flood damage. Singapore, with its large banking sector weighting, is lagging but has also encountered support above its October low.

On average, these are performances second only to the impressive Nasdaq 100 Index. All would have to break beneath their October lows to reaffirm the cyclical bear market and this now looks like a diminishing risk.

Interestingly and perhaps not surprisingly, Brazil, an underperformer for over a year, was the first GM to cut rates this year and this is reflected in the recovery underway. Today the Index faces a triple waterfall of potential resistance from the psychological 60,000 level, the declining MA and the underside of its large top formation. If it can push back above the MA in coming weeks, and the upward dynamics since October suggest that it will, more investors will be attracted to this resources giant. The sterling-denominated JPMorgan Brazil Investment Trust (JPB LN) now looks like a recovery candidate (see also other vehicles in the Library by searching for Brazil).