COLUMN - How to stop worrying and love emerging markets: James Saft

By James Saft

LONDON (Reuters) - Emerging markets are very likely the next bubble, but don't let that stop you.

Emerging market shares are already expensive relative to developed market ones, but economic growth in places like China and India will continue to pull away, and investors will pay an increasing premium for that, especially if the ageing economic giants of the 20th century slip from their long term growth paths.

And in a process we've seen before with internet stocks and houses, big returns will attract big money, driving further rises and making it all seem very sensible, at least for a while.

The definition of "a while" is of course, as with all bubbles, the key question.

Amazingly, the case for emerging markets being both a bubble and a good investment is being made by legendary value investor Jeremy Grantham.

"This bubble, like all bubbles, will not be justified by long-term value but at least will be one of the least flaky bubble cases ever," Grantham, chairman of fund manager GMO, wrote in a note to clients.

"Perhaps once in a career any self respecting strategist, even a one trick "mean reversion" one like GMO, should have a go at predicting a major divergence, a true bubble. And this is ours."

He points out that U.S. gross domestic product has in recent years been growing at below its long term 3.5 percent rate in real terms, despite a very supportive global environment and huge amounts of cheap financing.