Emerging markets have been beaten up this year, but the sector still has its supporters.

Richard Bernstein, chief executive officer of Richard Bernstein Advisors, a subadvisor of Eaton Vance Management, isn’t sure why.

High inflation and overly generous growth prospects in the sector suggest emerging market stocks are not undervalued, he adds.  

“When I talk about people’s favorite place to invest, it’s emerging markets. But they do have an inflation problem, a very serious inflation problem,” Bernstein says.

India has the highest rate of inflation outside of frontier markets and Turkey, where citizens have been rioting, has the second-highest rate of inflation, he notes. The Arab Spring riots from last year stemmed from high consumer prices, he adds.

“If you can’t afford the bread, you can’t buy the toaster. Everybody believes in the emerging market consumer, but their purchasing power is being eroded. No one cares about that; [instead] they’re concerned about inflation in the U.S.,” he says.

Bernstein spoke as part of a panel yesterday at the Morningstar Investment Conference in Chicago that looked at the macro landscape.

Investors who cite the cheapness of some emerging market companies aren’t looking at the big picture, Bernstein says. It’s not just a low price-to-earnings ratio that makes a company cheap. Investors need to see other factors that might be influencing the ratio, including interest rates, inflation and risk premium, he says.

Investors should look at a country’s inflation rate and how that correlates to the stock market, he says. Those two measures are usually inverted.

“One reason why people say [emerging markets] are undervalued is because they haven’t looked at the inflation rate. Emerging markets have the highest inflation rates and the highest rates of money growth,” he says.

In the U.S., money growth is “spot on” the long-term average of 7 percent, he adds.

Moreover, emerging market growth expectations have been habitually too optimistic, Bernstein says.

Over the past several years, 55 to 60 percent of emerging-market companies have had negative earnings surprises, versus 25 percent in the U.S., he says.

“The expectations are too high,” he says. “People refuse to believe that growth prospects are not what they thought.”

Taking a slightly different view is James Montier, a member of the asset allocation committee at Jeremy Grantham’s GMO LLC. GMO has a baseline forecast of 6.2 percent growth for emerging markets, he says.

A “faction” in GMO thinks that baseline might be too high because of the Chinese real estate market and the financing issues there, which he says seems to be similar to what happened in the U.S.

Montier was on the panel with Bernstein and Michael Mendelson, portfolio manager of risk parity strategies at AQR.

Montier says there are value prospects in Europe, but the “the cheapest stuff is indistinguishable from the junk.”

Bernstein and Mendelson are still wary of Europe, although Bernstein says he’s watching the continent closely.

“As the pain gets worse in Germany, the more bullish we get on Europe,” Bernstein says.

The problem with Europe, Mendelson says, is its lack of growth policies and the fact that the euro crisis remains, even if it’s not grabbing many headlines.

“It’s still bubbling under, if not on knife edge,” he says.