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.
|Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.
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