We continue to expect a difficult absolute and relative returns environment for EM & APxJ through H1 2011, with somewhat better performance in H2.

Our scenario-weighted Target Prices of 1,290 for MSCI EM and 540 for MSCI APxJ are below consensus, with around 9% and 7% upside, respectively, from current levels. However, there is more than 20% downside to our bear case Target Prices.

Our factor modeling of earnings suggests a marked deceleration for both indices in EPS growth - from around 40% YoY in 2010 to 13% YoY on our Base Case (consensus over 20%) and 4% in our Bear Case. Earnings revisions breadth has recently turned negative.

We also expect consensus forward P/E multiples to remain below long-run average levels while inflation rises and policy tightening continues. The inflection point in this regard is likely to come in Q3.

David Fuller's view This is broadly in line with the Fullermoney view. After two superb years to the upside, one has to be more cautious about an environment where central banks in growth economies are tightening monetary policy to fight inflation.

Clearly, a lot depends on what happens to commodity prices.

While it was not difficult to identify a short and hopefully medium-term peak in the Continuous Commodity Index (Old CRB) (historic monthly & weekly), we have maintained for a decade that this is a secular bull market driven by our theme: Supply Inelasticity Meets Rising Demand.

Obviously there will be setbacks in secular trends because there is always a business cycle. Commodities are historically volatile so corrections will be dramatic in the event of sharp recessions such as we saw in 2008. The current pause should be more of a growth slowdown rather than a recession, but no one can know for certain until it is clearly over.

Meanwhile, I am hopeful that crude oil has seen a medium-term peak but it is still in an overall upward trend. I am more worried about corn, wheat and other grains and beans (see also yesterday's comments). They have the most bullish fundamentals of any commodities right now, due to low supplies and a poor initial start to the current crop cycle. Bullish fundamentals for staple foods are bad news for practically everything else.

A lengthy pause in the commodity supercycle would be good news for the growth economies and stock markets which we favour. For a bullish regional lead, watch Indonesia (weekly & daily) in particular as it has so often been an upside leader over the last decade. It has been firm recently.

For a possible bearish lead, watch India (weekly & daily). It has underperformed since last November's peak and now has another lower high. Fullermoney is bullish regarding India's long-term prospects but the possibility of a further setback, creating a better buying opportunity before it resumes the secular uptrend, remains.