Goldman to JPMorgan Say Sell Emerging Markets After SlideBy Ye Xie, Ksenia Galouchko and Kyoungwha KimJan 7, 2014 11:51 PM GMT+0200

Wall Street’s biggest banks say the slump in emerging-market assets thatleft equities trailing advanced-nation shares by the most since 1998 lastyear will prove more than a fleeting selloff.

Goldman Sachs Group Inc. recommends investors cut allocations indeveloping nations by a third, forecasting “significantunderperformance” (/quote/EEM:US) for stocks, bonds andcurrencies over the next 10 years. JPMorgan Chase & Co. expects local-currency bonds to post 10 percent of their average returns (/quote/JGENDVUU:IND) since 2004 in the coming year, while MorganStanley projects the Brazilian real, Turkish lira and Russian ruble willextend declines after tumbling as much as 17 percent in 2013.

While the economies of Brazil (http://topics.bloomberg.com/brazil/),Russia (http://topics.bloomberg.com/russia/), India(http://topics.bloomberg.com/india/) and China(http://topics.bloomberg.com/china/) symbolized the increasing powerof the developing world during the worst of the global financial crisisand delivered outsized returns, Morgan Stanley says some of the same nations may now prove to be laggards as the U.S. Federal Reserve scales backunprecedented stimulus and interest rates (http://topics.bloomberg.com/interest-rates/) rise. The MSCI Emerging Markets Index is down 3.1percent this year, compared with a 0.8 percent drop in the developed-market index, and hit a four-month low yesterday as data from China showedweakness in manufacturing and services.

“The world not long ago was so mesmerized by the emerging markets withoutdistinguishing the good from the bad,” Stephen Jen, a partner at SLJ MacroPartners LLP who correctly predicted the selloff in developing nations last year,said in a phone interview from London (http://topics.bloomberg.com/london/) on Dec. 18. “The cost of capital will start to normalize and that’s whenwe see the truth being revealed in these markets.”

Bonds, Stocks

The MSCI emerging markets (http://topics.bloomberg.com/emerging-markets/) index fell 0.1 percent to 971.48, dropping for a fifth day. The SouthKorean won weakened 0.3 percent versus the dollar, while the Indonesianrupiah fell 0.5 percent.

Emerging-market local-currency bonds (/quote/JGENDVUU:IND) returned205 percent in dollar terms in the decade through 2012, compared with a 58 percent gain for U.S. Treasuries, according to data compiled byJPMorgan and Bank of America Corp. The MSCI index of stocks advanced 261 percent, outpacing the 69 percent rally in the developed-marketmeasure.

Last year, domestic bonds in developing nations lost 6.3 percent, the most since 2002 when JPMorgan started compiling the data. The MSCIemerging-market equity gauge declined 5 percent, compared with a 24 percent rally in MSCI’s World Index, the biggest underperformance in 15years, according to data compiled by Bloomberg.

China Lending

“It’s a structural de-rating that’s taking place” in emerging markets, John-Paul Smith, a Deutsche Bank AG strategist in London, said in a phoneinterview Dec. 18. Developing-nation stocks will trail their peers in advanced economies by a further 10 percent in 2014, he said.

The recovery in developing economies, which contributed to 65 percent of the global expansion since 2010, is struggling to gather momentum asexports (/quote/IEX%25EMER:IND) grow at the slowest pace in four years. China, which buys everything from Brazil’s iron ore and Chile’s

(/photo/goldman-to-jpmorgan-say-sell-emerging-markets-after-retreat-/-iRNVw5YMMQUc.html)

Related

! Global Cyclical Stocks Favored, Lakos Says (http://www.bloomberg.com/video/global-cyclical-stocks-favored-lakos-says-P1Nx34FmTmqsCkXRGlaLhQ.html)

Prepare For Retirement (http://web.industrybrains.com/clicks.php?appId=10181&zid=52718b6fb0966&adId=72668&pos=1&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)More than 50% of retirement age individuals to not have enough savings (http://web.industrybrains.com/clicks.php?appId=10181&zid=52718b6fb0966&adId=72668&pos=1&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)Retirement Savings (http://web.industrybrains.com/clicks.php?appId=10181&zid=52718b6fb0966&adId=72668&pos=1&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)

Bad Credit? (http://web.industrybrains.com/clicks.php?appId=10181&zid=52d57d6a95775&adId=83172&pos=2&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)Find out what would affect your Credit Score (http://web.industrybrains.com/clicks.php?appId=10181&zid=52d57d6a95775&adId=83172&pos=2&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)Credit Score (http://web.industrybrains.com/clicks.php?appId=10181&zid=52d57d6a95775&adId=83172&pos=2&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)

Credit Cards Tips (http://web.industrybrains.com/clicks.php?appId=10181&zid=52d582ae44958&adId=83174&pos=3&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)A good credit card can save you money. Follow these tips to find the best credit card for you. (http://web.industrybrains.com/clicks.php?appId=10181&zid=52d582ae44958&adId=83174&pos=3&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)Credit Cards (http://web.industrybrains.com/clicks.php?appId=10181&zid=52d582ae44958&adId=83174&pos=3&impt=1394445840&zoneId=646&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)

Sponsored Links (/photo/indian-rupee-/-iyvdIOaaSJDs.html)

SaveShare

PERSONAL FINANCE

Goldman to JPMorgan Say Sell Emerging Markets After Slide - Bloomberg http://www.bloomberg.com/news/2014-01-07/goldman-to-jpmorgan-sa...

1 din 9 10.03.2014 12:05

copper, is facing the threat of bank failures (http://topics.bloomberg.com/bank-failures/) as local government debt increased 20 percent annuallysince 2010.

While emerging markets are still expanding faster than developed countries, the margin will shrink this year to the smallest since 2002, according toCredit Suisse Group AG. The growth rate in advanced economies (/quote/IGDCEMER:IND) will almost double to 2.1 percent this year, whileemerging markets expand 5.3 percent, compared with 4.7 percent in 2013.

Peso, Real

Investors can still find value in developing nations as they differentiate economies based on growth momentum, inflation and balance of payments,according to Sara Zervos, who helps oversee $15 billion in assets at Oppenheimer Funds Inc.

Mexico’s peso appreciated 14 percent against the Brazilian real last year as President Enrique Pena Nieto opened the oil industry to private drillingfor the first time in 75 years. South Korea’s won-denominated bonds returned 2.6 percent as its current-account surplus reached a record high.

“There will be a competition for marginal capital flows,” Zervos said in a phone interview on Dec. 20 from New York(http://topics.bloomberg.com/new-york/). “There will be winners and losers.” Investors should favor the Mexican peso, South Korean won andIndian rupee, while avoiding the rand, real and rupiah, she said.

Aberdeen Asset Management Plc and HSBC Asset Management said valuations in some developing nations are becoming attractive after the recentselloff.

Thai Shares

The MSCI Emerging Markets Index traded (/quote/MXEF:IND) at a multiple of 10.3 times projected 12-month earnings, compared with 14.9 fordeveloped markets, the biggest discount since 2006, according to data compiled by Bloomberg.

Adithep Vanabriksha, the Bangkok-based chief investment officer for Thailand (http://topics.bloomberg.com/thailand/) at Aberdeen, says he isbuying Thai stocks as valuations fell to the lowest levels in 18 months. Rakesh Arora, the head of research at Macquarie Group Ltd. in Mumbai andIndia’s most accurate equity forecaster, says the S&P BSE Sensex will advance 13 percent in 2014.

“When people are running away, we are happy to get in,” Guillermo Osses (http://topics.bloomberg.com/guillermo-osses/), who oversees $14.5billion as the head of emerging-market debt at HSBC Asset Management in New York, said in a phone interview on Dec. 19. Osses said he’s buyingthe currencies and short-term debt in Brazil and South Africa following their slumps.

Debt Increase

The Fed said Dec. 18 that it plans to take the first steps toward cutting the stimulus that helped fuel the credit boom across emerging markets overthe past five years, by reducing its monthly bond purchases by $10 billion to $75 billion.

Even a small capital outflow and increase in borrowing costs will have adverse impacts on governments and companies in developing countries(http://topics.bloomberg.com/developing-countries/) as debt levels increased, according to Morgan Stanley.

Net debt (/quote/MXEF:IND) amounted to 1.25 times earnings before interest, taxes, depreciation and amortization for companies in the MSCI’semerging market gauge, up from 0.68 in June 2009, according to data compiled by Bloomberg. Average borrowing costs (/quote/JGENEMYM:IND) for developing-country governments jumped to 6.96 percent on Jan. 2, the highest since Mach 2010, according to JPMorgan’sGBI-EM Diversified Index.

“We’re at the mature end of the credit cycle in emerging markets, which suggests we may see increased financial-sector and fiscal risks, which arenot priced in by the markets,” Rashique Rahman, co-head of foreign-exchange and emerging market strategy at Morgan Stanley in New York, saidby e-mail on Dec. 18.

Goldman’s Call

Morgan Stanley recommended investors reduce holdings of emerging-market currencies and bonds on Dec. 3, saying the developing world “facesthe challenge of regaining a decade of lost competitiveness.” The bank labeled Brazil, India, Indonesia (http://topics.bloomberg.com/indonesia/),South Africa (http://topics.bloomberg.com/south-africa/) and Turkey (http://topics.bloomberg.com/turkey/) as the “fragile five” in August,because of their reliance on foreign capital.

Goldman Sachs advised clients (http://www.cnbc.com/id/101289746) to cut their emerging-market allocation to 6 percent from 9 percent, citingthe lack of economic reforms to improve growth, CNBC reported on Dec. 22. Leslie Shribman, a spokeswoman for Goldman Sachs in New York,

Goldman to JPMorgan Say Sell Emerging Markets After Slide - Bloomberg http://www.bloomberg.com/news/2014-01-07/goldman-to-jpmorgan-sa...

2 din 9 10.03.2014 12:05

confirmed the report without commenting further.

JPMorgan expects a return as low as 1 percent for local-currency bonds this year, compared with an average gain of 10 percent over the past decade,according to its 2014 outlook report.

As economies in developing nations slow, political and social tensions are flaring. The Thai baht (http://topics.bloomberg.com/thai-baht/)tumbled to a three-year low on Jan. 2 as anti-government protesters attempted to force Prime Minister Yingluck Shinawatra out of office.

Corruption Probe

Turkey’s stock benchmark lost 28 percent in dollar terms last year, the worst performance after Peru (http://topics.bloomberg.com/peru/), as thecurrent-account deficit widened and a corruption probe ensnared Prime Minister Recep Tayyip Erdogan (http://topics.bloomberg.com/recep-tayyip-erdogan/)’s cabinet and led to three ministerial resignations.

In Ukraine, protesters took to the streets last month as President Viktor Yanukovych (http://topics.bloomberg.com/viktor-yanukovych/) backedout of a trade deal with the European Union in favor of closer ties with Russia.

Twenty-three developing countries, including Brazil, Turkey and India, face elections this year, increasing “political uncertainty” and marketvolatility, according to JPMorgan.

Debt levels are increasing as incumbent governments increase spending to win voters, according to Citigroup Inc. Public debt in emerging marketsrose to more than 40 percent of their gross domestic product in 2013, the highest since 2006, Citigroup data show.

“Emerging markets will probably find it difficult to sustain the steady improvement in sovereign creditworthiness that has helped to define the assetclass since 2004,” David Lubin (http://topics.bloomberg.com/david-lubin/), the head of emerging-market economics at Citigroup, wrote in a noteon Dec. 2.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net (mailto:yxie6@bloomberg.net); Ksenia Galouchko in Moscowat kgalouchko1@bloomberg.net (mailto:kgalouchko1@bloomberg.net); Kyoungwha Kim in Singapore at kkim19@bloomberg.net(mailto:kkim19@bloomberg.net)

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net (mailto:tbarak@bloomberg.net)

t (https://www.facebook.com/sharer/sharer.php?u=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)a (https://twitter.com/share?url=http%3A%2F%2Fbloom.bg%2F1abasuM&counturl=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html&text=Goldman+to+JPMorgan+Say+Sell+Emerging+Markets+After+Slide&via=BloombergNews)s (https://plus.google.com/share?hl=en&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html)r (http://www.linkedin.com/shareArticle?mini=true&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2014-01-07%2Fgoldman-to-jpmorgan-say-sell-emerging-markets-after-slide.html&title=Goldman+to+JPMorgan+Say+Sell+Emerging+Markets+After+Slide&summary=Wall+Street%E2%80%99s+biggest+banks+say+the+slump+in+emerging-market+assets+that+left+equities+trailing+advanced-nation+shares+by+the+most+since+1998+last+year+will+prove+more+than+a+fleeting+selloff.&source=Bloomberg.com)

From

The Web

by Taboola (//www.taboola.com/en/popup?template=colorbox&taboola_utm_source=bloomberg&taboola_utm_medium=bytaboola&taboola_utm_content=thumbs-2r:well-thumbs-2r:)

Sponsored Content (//www.taboola.com/en/popup?template=colorbox&taboola_utm_source=bloomberg&taboola_utm_medium=bytaboola&taboola_utm_content=thumbs-2r:well-thumbs-2r:)

(http://segment.com/oscars-pizza-guy-was-real-made-300-tip/?utm_source=taboola&utm_medium=referral)

Oscars Pizza Guy Was Real, Made $300 TipSegment.com

(http://segment.com/oscars-pizza-guy-was-real-made-300-tip/?utm_source=taboola&utm_medium=referral)(http://womanitely.com/worlds-most-beautiful-national-parks/?utm_source=taboola&utm_medium=referral)

10 World's Most Beautiful National ParksWomanitely

(http://womanitely.com/worlds-most-beautiful-national-parks/?utm_source=taboola&utm_medium=referral)(http://travel.amerikanki.com/most-dangerous-cities-in-the-world/?utm_source=taboola&utm_medium=referral)

10 Most Dangerous Cities in the World

Goldman to JPMorgan Say Sell Emerging Markets After Slide - Bloomberg http://www.bloomberg.com/news/2014-01-07/goldman-to-jpmorgan-sa...

3 din 9 10.03.2014 12:05