China's policy shifts are a bigger driver of the selloff in emerging markets than the Federal Reserve's decisionto dial back stimulus, according to Goldman Sachs AssetManagement.

Volatility will rise toward its long-term average, and thatmeans an increase in risk premiums, said Philip Moffitt, head offixed income in Sydney for Asia and the Pacific at Goldman SachsAsset Management, which had $991 billion of assets undersupervision worldwide as of September. The risks for differentemerging economies will become more idiosyncratic and Mexicopresents a buying opportunity following the rout, he said.

Markets from Turkeyto South Africa and Argentina were roiled during the past month as investors soldoff emerging-economy currencies, stocks, and bonds, promptingemergency measures from governments and central banks. The bout ofrisk aversion follows the Fed's decision to scale back assetpurchases and China's pledge to rein in leverage and give market forces amore decisive role in allocating resources.

“The selloff in emerging markets has much more to do with Chinathan with Fed tapering,” Moffitt said yesterday in an interview inSydney. “China's such a big source of global demand, in particularfor other emerging markets, uncertainty's going to stay high andrisk premiums should be expanding.”

The worst isn't over for emerging markets, Mark Mobius, whooversees more than $50 billion in developing nations as anexecutive chairman at Templeton Emerging Markets Group, said in aninterview. Prices can decline further or take time to stabilize, hesaid.

China's policy makers have attempted to rein in theunprecedented credit boom they unleashed in 2008-2009 amid theglobal financial crisis. Money market rates in China have surged,the cost of insuring against credit default by banks has increased,and payment difficulties are emerging in the country's $6 trillionshadow-banking industry.

“They're looking to create a market that prices credit risk,rather than having prices imposed,” Moffitt said. “In the absenceof a strong mechanism for pricing credit risk, there's likely to bea lot of uncertainty and volatility.”

The world's second-largest economy is predicted to expand by 7.4percent this year, the slowest pace since 1990, according to themedian estimate in a Bloomberg News survey.

Diverging Outlooks

The slowdown in China comes as the U.S. economy is showing signsof a pickup, allowing the Fed to trim its monthly bond purchases to$65 billion from $85 billion. U.S. growth is expected to accelerateto 2.8 percent in 2014 from 1.9 percent last year, according to aanother Bloomberg poll.

Moffitt said investing in Mexico would be his top trade at themoment because the country's fundamental outlook is strong eventhough it has been affected by the global selloff.

“There's been outflow from emerging-market assets and when youget that kind of flow people sell what they can sell, oftenhigh-quality assets,” he said. “It will benefit from the strongU.S. growth we're expecting and there's the prospect for rate cuts,so Mexico stands out to us on both value and fundamentals.”

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