So are emerging markets likely to underperform or outperform this year? Consider the following:

(1) Growing. Markit released January’s HSBC Emerging Markets Composite Purchasing Managers' index on February 10. Despite all the unsettling headline news about emerging markets, the index remained above 50 at 51.4, down slightly from December’s 51.6; it is the sixth consecutive reading above 50. The press release noted that manufacturing remained stronger than services.

(2) Lagging. The Emerging Markets MSCI (in dollars) has been underperforming the All Country World MSCI since their October 2011 lows. Since then, the former is up only 15.4%, while the latter is up 54.4%.

(3) Cheapening. The underperformance of the EM MSCI since the summer of 2011 is largely attributable to its forward price/earnings ratio, which has been moving sideways around 10. Over the same period, the World index p/e is up more than 30% (to 13.9), led by a 50% increase in the U.S. (to 15.3).

(4) Flat-lining. The EM MSCI stock price index also has been moving sideways with some volatility since the summer of 2011, along with both the Commodity Research Bureau BLS Raw Industrials Spot Price index and the price of a barrel of Brent crude oil. The close relationship among these three variables suggests that the EM MSCI is likely to continue underperforming as long as commodity prices remain flat. That’s the most likely outlook this year if global economic growth remains subdued, as I expect.

Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.