Emerging-market equities are set to return as much as 20 percent to investors next year as consumers drive growth in developing nations, leaving them less reliant on the U.S. and Europe, Schroder Investment Management says.

The MSCI Emerging Markets Index, the benchmark stock gauge for 21 emerging markets, and the MSCI World Index of developed- nation stocks are diverging by the most in almost six months, with the developing-country measure’s 120-day correlation coefficient with the MSCI World falling to 0.73 Friday, the least since June 28, data compiled by Bloomberg show. A reading of 1 indicates securities are moving in tandem.

“The relative resilience of emerging markets over the last decade has just been increasing, and this trend will continue,” Allan Conway, head of emerging-market equities at Schroder in London, where he manages about $25 billion, said in a phone interview Dec. 10. “Part of it is the massive consumer demand story in places like India and China which has led to both domestic demand and changes in global trade patterns, the key factors behind decoupling.”

Conway’s Schroder International Selection Fund - Emerging Markets has returned 21 percent in 2012 and beaten 84 percent of its peers, data compiled by Bloomberg show. In August 2009 he predicted emerging-market stocks would extend their 52 percent gain that year. The MSCI developing-nations index ended 2009 up 75 percent, a record annual advance.

334% Return

The emerging-markets gauge has returned 17 percent in 2012 and 334 percent over the past 10 years, data compiled by Bloomberg show. That compares with a 15 percent return for the Standard and Poor’s 500 Index this year and the 19 percent earned on the Stoxx Europe 600 Index. U.S. equities have returned 90 percent since 2002, and European shares 86 percent.

The International Monetary Fund is predicting emerging- market economies will grow 5.6 percent next year, while the Washington-based lender’s forecast for global expansion is 3.6 percent, according to an Oct. 9 report. India and China will drive economic growth among developing nations in 2013, according to Conway.

China’s economy is already showing signs of climbing out of its seven-quarter slowdown with retail sales rising at the fastest pace since March last month and indications that factory output is climbing.

The Shanghai Composite Index of domestic shares has returned 0.3 percent in 2012, while India’s BSE India Sensitive Index earned 27 percent, the most of the biggest emerging markets. Offshore funds plowed $22.24 billion into Indian equities this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.

Selloff Trigger

Developing-nation stocks are poised to fall, exceeding a level that preceded previous selloffs, after emerging-market equity funds posted the most weekly inflows in 10 months, according to Bank of America Corp.

Investors poured $5.3 billion into the funds in the past week, bringing four-week inflows to 1.7 percent of their assets under management, Michael Hartnett, the New York-based chief investment strategist at Bank of America, wrote in an e-mailed report yesterday. That triggers a sell signal from Hartnett’s fund flows “trading rule,” which says four weeks of inflows totaling at least 1.5 percent of assets under management precede market declines.

Markets most vulnerable to potential sell-offs will be those currently most overbought, such as Turkey, Mexico, China and India, Hartnett said. When the last sell signal occurred in February, developing-nation equities peaked in absolute terms a month later, Hartnett said. The average drop after previous sell signals was 4 percent in the following four to five weeks, according to the report.

‘Very Positive’

India’s gross domestic product expanded 5.3 percent last quarter, while China’s economy grew 7.4 percent in the third quarter. U.S. GDP rose 2.7 percent and the euro area economy contracted 0.6 percent amid the ongoing sovereign debt crisis.

“The emerging markets’ economic fundamentals as far as the fiscal and trade situation are very positive,” Conway said. Returns on emerging-market stocks will rise as Europe continues to “muddle through” its debt woes and the U.S. resolves its disagreements over the federal budget, he said.

The MSCI emerging-markets gauge’s rally this year has sent valuations to 12 times estimated earnings, compared with the 12 percent increase in the developed-market index, which has a valuation of 14, data compiled by Bloomberg show.

‘Extremely Healthy’

Improvement in global manufacturing should also help stoke gains in emerging markets, according to Jan Dehn, co-head of research at Ashmore Investment Management Ltd., which oversees about $68 billion in emerging market assets. Chinese manufacturing is expanding at a faster pace this month from November, according to a preliminary reading released today of a purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics.

“The broader outlook for emerging markets remains extremely healthy,” Dehn said in a Dec. 11 phone interview from London.