Investors head to the emerging markets (EMs) for the opportunity to earn big returns. Of course, those big opportunities also come with the risk of big losses.
This year’s sell-off in EM stocks, bonds and currencies has been particularly brutal with countries like China, Russia, and Brazil deep in the red.
When you consider EM stocks relative to developed market (DM) stocks, you’ll notice that the former has been a major underperformer for years.
“Except a short patch during the financial crisis of 2007-8, the period from end-2010 to present marks the only episode during which EM equities have consistently underperformed for over 10 years,” write Deutsche Bank’s Priyal Mulji and John-Paul Smith. “The EM underperformance gap versus DM has persistently widened over 2013.”
“Whilst we do not anticipate that EM equities will give back all of their relative outperformance since 2001, we do think that we are in the middle of a multi-year 10 relative bear market against DM equities, led by the US, which has long been our preferred market,” they added
And you can blame the world’s second biggest economy.
“The driving force behind the next leg down in GEM is likely to be a further deterioration in the Chinese economy, whose weakness is already having a pronounced effect on commodity prices. Our best guess is that EM equities may underperform their US peers by up to 50% before the cycle is over, but the precise outcome is dependent on a number of variables, most notably government policies, which are hard to predict, and on the outlook for DM economies.”
From Deutsche Bank:
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