(Bloomberg News) Emerging-market stocks may rise 39 percent by the end of next year, spurred by a "soft landing" for China's economy, earnings growth and cheap valuations, according to Morgan Stanley.

The MSCI Emerging Markets Index may jump to 1,355 by the end of 2012 from 976.86 at the end of trading yesterday, Jonathan Garner, Morgan Stanley's chief emerging-market and Asia strategist, said in an interview from Singapore. The U.S. brokerage joined UBS AG in favoring Chinese stocks for next year, bolstered by confidence the government will loosen monetary policies to support Asia's biggest economy.

"Inflation is probably going to fall going forward and we hope for a soft landing in growth," said Hong Kong-based Garner, whose Asian research team was second-ranked by Institutional Investor magazine this year. "We should be in a better environment for the stock market."

The MSCI developing-nation index has rallied 17 percent from this year's low on Oct. 4, as policy makers from China to Indonesia moved to support economic growth by refraining from raising borrowing costs or by lowering them. The emerging- markets gauge trades at 10.4 times estimated earnings, compared with 12 times for the MSCI World Index, according to data compiled by Bloomberg.

"We suspect the rally has already begun from the low in early October," said Garner. MSCI's emerging-markets gauge dropped 0.7 percent to 969.74 as of 12:47 p.m. in Singapore, following a two-day, 2.4 percent increase.

China Rally

Morgan Stanley favors China most among emerging markets in Asia and its consumer companies. The Shanghai Composite Index has risen 9.1 percent from this year's low on Oct. 21 as inflation slowed and the government announced measures to help small businesses through easier access to bank loans. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong has climbed 15 percent since Oct. 21.

China's consumer price gains slowed to 5.5 percent in October from a three-year high of 6.5 percent in July, giving the government greater scope to unwind monetary tightening as Europe's debt crisis hurt exports.

"We expect a soft landing in China and earnings growth should hold up very well in this environment, we think the market is too cheap," said Garner. China may cut interest rates in the first half of 2012, he said.

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