This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Global Unrest and China, Not Fed, Threaten Emerging Markets: Deutsche Bank

NEW YORK (TheStreet) -- Turmoil in the Chinese economy and populist pressures in other emerging markets, rather than U.S. interest rates, are likely to drive performance for emerging markets stocks over the longer term, according to recent research from Deutsche Bank.

Deutsche Bank strategists led by John-Paul Smith believe political unrest in many developing countries, which they call "governance concerns," as well a major overhaul of Chinese government institutions, will cause emerging markets assets to underperform those of developed countries for the foreseeable future.

"The lack of visibility surrounding future possible actions by the Chinese authorities to reform the economy, will engender further volatility for financial markets and will eventually cause some longer term investors to question their commitment to the [global emerging markets] asset class," Smith writes. His views echo those of Goldman Sachs economists, who recently downgraded their view on emerging markets.

While emerging markets stocks handily outperformed those of developed markets for a decade beginning roughly in 2000, they began to lag in late 2010. Starting Sept. 24, 2010, iShares MSCI Emerging Markets Index (EEM), a popular emerging markets exchange-traded fund, has lost 12.50%, while the S&P 500 has gained about 43% over the same time period. Year to date, with the S&P up 13%, EEM is down more than 15%.

When Fed Chairman Ben Bernanke ignited a market selloff June 19 by stating the Federal Reserve could begin reducing its $85 billion in monthly bond purchases this year, emerging markets stocks fell even more sharply than the S&P, as EEM lost 7.41% vs. 3.81% for the S&P from June 19-20.

Smith argues the latest emerging markets selloff was actually ignited by earlier statements by Bernanke May 22. Regardless, the real factor of late has been the inaction of the People's Bank of China in the face of market panic. Even as overnight interbank lending rates shot up from 3% to anywhere between 12% (Bloomberg) to 25%(The Economist) on June 20, the Chinese central bank did nothing to ease the liquidity squeeze.

Deutsche Bank's strategists view the PBoC's inaction as only the latest indication that "the authorities in China face an almost insurmountable task to restore historic rates of productivity growth" due to "very blurred boundaries which exist between the state and private sector which distort capital allocation" among large businesses. They only long-term solution, they argue, is "a complete overhaul of the fiscal relationship between local and central government, which would also involve wholesale changes to the fundamentals of land ownership."

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,912.11 -70.48 -0.42%
S&P 500 1,969.95 -8.96 -0.45%
NASDAQ 4,442.6980 -2.2110 -0.05%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs