The decade-long outperformance of developing-nation assets hasended, according to the Goldman Sachs Group Inc. economist whopredicted the rise of the biggest emerging markets in 2003.

The five trends that spurred outsized gains during the past 10years—surging growth in the so-called BRIC nations, highercommodities, improved government finances, slower inflation andlower U.S. bond yields—are halting and in some cases reversing,Dominic Wilson, the chief markets economist at New York-basedGoldman Sachs, wrote in a report dated yesterday.

“While cyclical opportunities will come and go, the era ofstructural outperformance for EM is probably over,” he wrote.

Emerging-market stocks, bonds, and currencies tumbled today amidspeculation the U.S. Federal Reserve will reduce monetary stimulusthat has spurred $3.9 trillion of capital inflows into developingnations during the past four years. Wilson—who predicted Brazil,Russia, India, and China would join the ranks of the world'slargest economies in a 2003 research report while working witheconomist Jim O'Neill—now says their contribution to global growthis peaking. O'Neill, who retired from Goldman Sachs this year,coined the BRIC moniker in 2001.

The MSCI Emerging Markets Index sank 3.2 percent to an 11-monthlow of 916.17 at 8:32 a.m. in New York, while currencies in India,the Philippines, and South Korea weakened more than 1 percent andSouth African bond yields surged.

Even with the recent losses, the MSCI emerging index has climbedabout 214 percent since the end of 2002, compared with an 85percent gain in the Standard & Poor's 500 Index. JPMorgan Chase& Co.'s gauge of developing-nation currencies has returned 103percent in the same period.

“Over the next decade, EM assets are unlikely to deliver thekind of risk-reward that investors had become used to in the lastone,” Wilson wrote. “And absolute returns will likely be muchlower.”

Jan Dehn, the head of research at Ashmore Investment Management,says declines in emerging markets are a buying opportunity becausevaluations have gotten cheap.

The MSCI gauge trades for 1.4 times net assets, a 28 percentdiscount versus the MSCI World index of developed-nation shares,according to data compiled by Bloomberg. That compares with anaverage discount of less than 1 percent during the past fiveyears.

“The right thing to do here, obviously, is to buy,” Dehn said bye-mail.

Valuations in developing-nation debt and currency markets havebecome more expensive in the past decade, according to Wilson. Theextra yield investors demand to own emerging-market governmentbonds over Treasuries has dropped to about 1.1 percentage pointfrom 4 percentage points, excluding Argentina and Venezuela, hewrote. The average emerging-market currency is now 10 percentovervalued, according to Wilson, who cited a Goldman Sachsmodel.

The economist said investors may need to focus oncountry-specific drivers, instead of relying on a repeat of thewidespread rally in emerging markets that defined the lastdecade.

“What we may be seeing is a return to conventional EM investing,where differentiation rather than broad exposure to the asset classbecomes a larger part of the investment process,” Wilson said.

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