There probably won’t be much Dom Perignon flowing at this week’s G-8 meeting, that got underway yesterday. In the first half of the year, world stock markets lost more than $3 trillion in value, and the pain was felt from one end of the globe to the other.

Leading the dismal performance were the emerging markets, with most sector funds down between 15% 20% year-to-date, after having posted 30% annualized gains for the past five years. Worse, China’s Shanghai Composite Index collapsed by more than 50% in the first six months of the year, as the country faced not only economic hurdles but also a public outcry concerning its Tibet policy.

Could it be time to go back in?

Joyce Chang, who heads up JPMorgan Chase’s emerging markets research, says China looks attractive. Her firm is promoting the emerging markets sector and highlighting China in particular.

“Aside from the Middle Eastern markets, emerging markets have been poor performers,” she says. “Everyone invested in Asia last year, but those markets have been hemorrhaging this year. They have been moving with inflation expectations and especially with oil prices. Everyone got the oil price wrong.”

Just as investors began to look for internal growth in countries such as China and India to supplant export income as the prime driver of income, spiraling inflation in those countries began to blunt the local growth outlook.

Coming into this year, the prime concern was an American recession. Now it’s inflation. The governments of many of the countries have been raising interest rates to control inflation; the Asian countries have been behind the curve.

Still, researchers at JPMorgan Chase say the basic case for the emerging markets sector is intact. Profit growth for many of the emerging economies remains considerably stronger than that of the developed world, according to Ms. Chang, while the economic, earnings, and market volatility of the region has improved over time. “The EM group will grow at 6.2% this year,” she says, “nearly four times the rate of the developed countries. The local currencies will appreciate as well. In 2007 the local currency index was up 17%.”

Based on price/earnings multiples compared to growth, the emerging markets are a bargain. Also, emerging markets equities account for only 11% of the MSCI Emerging Markets Index, while those economies are expected to total 28% of global gross domestic product in 2009. By contrast, America accounts for 40% of the MSCI world weight, but only an expected 26% of world nominal GDP.

Among emerging countries today, Ms. Chang says, China stands out. “China has 43% of emerging market foreign exchange reserves,” she says. “Also, the government will allow the currency to appreciate in order to manage inflation. We think China is one of the few countries where inflation has peaked and where growth will be above 10%.”

Indeed, as of mid-June, JPMorgan Chase expected the renminbi to appreciate at an annualized rate of 17%. At the same time, much of China’s inflation concerns earlier this year centered on food prices, which seem to have moderated. “There were some external shocks that drove food prices higher,” Ms. Chang says. “They had diseases and bad weather.”

Now concern has shifted to the prices of other components, such as oil and iron. But the government has been tackling excess liquidity. Among other measures, it has tightened bank reserve requirements five times this year.

Another attractive feature of the Chinese landscape is that the economy is operating on more than one cylinder. It is not overly dependent on exports, or commodities. One sector that Ms. Chang’s group is especially keen on is infrastructure spending. Her team spotlights companies such as China Railway Group, China Railway Construction, and China Communications Construction Company as likely to benefit from spending growth.

When the research group upgraded its recommendation on China three weeks ago, it was selling at a forward price-to-earnings ratio of 13.5x, “a 17% premium to MSCI emerging markets. This premium has narrowed from 42% at the beginning of the year,” the report said.

Ms. Chang’s group is not alone in its enthusiasm for Chinese equities. The China team at economics powerhouse ISI notes that profit growth in the latest month rebounded to nearly 21% from 16.5% five months ago. At the same time, the trailing multiple being paid for A shares is around 21 times, down from close to 50 times last year, a level that the analysts deem “fair.”

As we approach the August 8 start of the Beijing Olympics, China will certainly be in the headlines. Though some fear that pro-Tibet demonstrations or foul air could dull China’s coming-out party, I doubt that either will mar the country’s world debut. Already scores of factories have been shut down as the government attempts to clear pollution (an exercise that could deflate growth by as much as 1%), and tight control over visas will likely limit the presence of would-be protesters.

Still, the ruckus over Tibet has caught the country off guard and has led to even greater efforts to ensure that the games are a success. Investors, too, were spooked by the worldwide demonstrations and by the threat of rising oil prices and resulting inflation.

“Investors’ view of China is so one-sided now,” Ms. Chang says. “The stock market there was overdue for a correction. Valuations are back to an attractive level.”

If Ms. Chang is right, Chinese sprinters may not be the only ones bringing home the gold.

peek10021@aol.com