(Bloomberg News) Emerging-market stocks are trading at levels 35 percent cheaper than their 15-year average as rising profits and falling interest rates from Brazil to Indonesia buoy investor confidence.

While the MSCI Emerging Markets Index's 9.7 percent gain from this year's low on Oct. 4 lifted its price-earnings ratio to 10.3 from 9.7, the gauge is still trading below its mean since 1996, according to data compiled by Bloomberg. The measure jumped an average 35 percent after developing-nation policy makers began cutting interest rates in 2003, 2005 and 2008.

Investors pulled $26 billion from emerging-market mutual funds in the first nine months and the stock indexes sank about twice as much as advanced nations after Indonesia, Poland and Brazil raised interest rates. Now borrowing costs are coming down as policy makers seek to spur expansions at a time when export growth and inflation are slowing. The MSCI index may rise 30 percent in a year as record earnings outweigh Europe's debt crisis, more than 17,000 forecasts compiled by Bloomberg show.

"You still have great relative growth advantages for a lot of the underlying economies and very cheap stocks," David Donabedian, who oversees about $17 billion as chief investment officer at Atlantic Trust, said in a Bloomberg Television interview. "We'll begin to see better performance out of the emerging markets over the next three or four months and the reason is we're going to see some positive policy changes."

Petrobras Gains

Federated Investors Inc., which oversees about $352 billion, has been buying developing-nation equities in the last few weeks, Philip Orlando, the firm's chief equity market strategist in New York, said on Nov. 10. Shanthi Nair, a global strategist at Nomura International Plc in London, lifted her recommendation on emerging stocks to "overweight" from "underweight" on Nov. 6. Goldman Sachs Group Inc. advised clients the same day to bet Chinese shares will rally.

Energy and raw-materials companies have led gains in the MSCI emerging-market index from this year's low as Rio de Janeiro-based Petroleo Brasileiro SA, Brazil's state-owned oil producer, and Hong Kong-listed Zijin Mining Group Co., China's biggest gold producer by market value, rose more than 15 percent.

Petrobras was valued at 0.6 times net assets in September, the lowest level since 1999, according to data compiled by Bloomberg. Zijin, located in Fujian province, fell to 1.5 times net assets, the lowest since October 2008, the data show.

Inflation Slows

The MSCI emerging-market index is down 21 percent this year, compared with a 12 percent drop in the MSCI World Index of advanced-country shares. The Hang Seng China Enterprises Index has lost 24 percent, the BSE India Sensitive Index sank 21 percent, Brazil's Bovespa declined 19 percent and Russia's Micex slid 18 percent.

Central banks in seven of the 10 biggest emerging economies increased borrowing costs in the first half to slow inflation as a rally in commodities pushed the S&P GSCI Spot Index to an almost three-year high in April. The index of raw-materials has since dropped 16 percent as the global economic expansion cooled, reducing inflation from 2011 peaks in every major emerging economy except Turkey and South Africa.

Brazil has cut its benchmark Selic interest rate by 1 percentage point since August to 11.5 percent and Indonesia unexpectedly lowered its reference rate by half a percentage point to 6 percent on Nov. 10. While Poland and Mexico left borrowing costs unchanged at their latest policy meetings, interest-rate futures show that traders are betting on reductions in the next 12 months. Traders in India are also wagering on lower rates even after the central bank increased borrowing costs on Oct. 25.

Europe's Crisis