Wall Street's biggest banks are wary about emerging market economies.
They believe the drop in emerging-market assets that left stocks trailing advanced-nation shares by the most since 1998 last year would prove more than a brief selloff.
The MSCI Emerging Markets Index has dropped 3.1% so far this year, compared with a 0.8% decline in the developed-market index. The gauge fell to a four-month low on 7 January after data from China highlighted weaker growth in the manufacturing and services sectors.
Goldman Sachs has asked investors to trim allocations in developing nations by a third, forecasting "significant underperformance" for bonds, currencies and stocks over the next decade, according to a Bloomberg report.
Morgan Stanley forecast the Brazilian real, Russian ruble and Turkish lira would depreciate further after losing about 17% in 2013.
BRIC economies have delivered huge returns in the past and Morgan says some of those nations could end up being the laggards as the US Federal Reserve unwinds its monetary stimulus and interest rates rise.
Meanwhile, JPMorgan expects a return as low as 1% for local-currency bonds this year, against an average gain of 10% over the last 10 years, according to its 2014 outlook report.
23 developing economies, including Brazil, India and Turkey, head to the polls this year, increasing "political uncertainty" and market volatility, according to JPM.
Credit Agricole CIB said in an 8 January note to clients: "EM Asia will grow 5.9% in 2014 and 2015, with China decelerating to 7.2% and 6.8%. Most other economies will pick up pace on improved growth in G3 markets. Asia's outperformance vs. the rest of the world is diminishing."
"The region is in the proces[s] of re-inventing itself towards a consumer-driven growth model; exports can no longer be the main driver given that external markets are growing too slowly and have become relatively small."
"Crédit Agricole CIB assumes that Asia will gradually decelerate, but maintain its global growth leadership, during this restructuring process."
Scotiabank said in a 7 January note to clients: "Latin America's economic outlook for 2014 will be shaped by a number of factors - Presidential elections in Colombia (May) and Brazil (October), a new government in Chile and the FIFA World Cup in Brazil."
"Additionally, moderating copper prices and currency volatility, resulting from US monetary actions, will remain key factors for policymakers. We expect the region as a whole to expand by an average of 3% in 2014-15."
Wall Street's Call
Goldman advised clients to lower their emerging-market allotment to 6%, from 9%, citing a dearth of economic reforms to improve growth as the reason behind its suggestion, CNBC reported on 22 December.
However, investors could still find value in developing economies provided they single out nations based on balance of payments, growth momentum and inflation, said Sara Zervos, who helps manage assets worth $15bn at US-based Oppenheimer Funds.
Investors ought to favour the Mexican peso, the South Korean won and the Indian rupee; while avoiding the South African rand, the Brazilian real and the Indonesian rupiah, Zervos told Bloomberg on 20 December.
Morgan recommended investors reduce holdings of emerging-market currencies and bonds on 3 December, saying the developing world "faces the challenge of regaining a decade of lost competitiveness."
Earlier, the bank tagged Brazil, India, Indonesia, South Africa and Turkey as the "fragile five" in owing to their dependence on foreign capital.
Bonds and Equities
In 2013, domestic bonds in developing nations lost 6.3%, the most since 2002 when JPM started collecting data.
The MSCI emerging-market stocks gauge shed 5%, against a 24% surge in the MSCI's World Index, the biggest underperformance in 15 years, according to Bloomberg data.
Emerging-market local-currency bonds delivered 205% in dollar terms in the decade through 2012, compared with a 58% gain for US Treasuries, according JPM and Bank of America data.
The MSCI index of stocks advanced 261%, outperforming the 69% rally in the developed-market gauge.