Lazar, head of research at US-based outfit Cornerstone Macro, says that although emerging markets have been the fastest-growing areas in the world over the last decade, investors need to change the way they view these economies.
"The ease of making money in the emerging markets is over," Lazar said.
According to FE Analytics, the MSCI Emerging Markets index has returned more than 200 per cent over the last decade. However, Lazar warns that investors cannot expect this level of growth in the future.
Performance of indices over 10yrs
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/1.%202013_Article_charts_%20&_graphics/20131202_EM_1.png)
Source: FE Analytics
She says that the reason why economic growth will continue to slow down in the leading emerging markets, and why sentiment will continue to be negative, is because many of them will have to deal with crippling inflation.
"Emerging markets have been important drivers of global growth and multinational earnings for over a decade," she explained.
"But that era may be ending. We believe that Brazil, India, Indonesia and China are facing significant inflation problems, which are at risk of unfolding into the most severe inflation problem the investment community has seen since the US crisis during the 1970s."
Lazar’s concerns over inflation stem from the rapid growth of these countries' money supply over the last 10 years. She says that in order for them to contain that inflation, they need a period of sustained weaker growth.
The economist says authorities face a very difficult task of keeping a lid on the problem and believes it could be another 10 years before they get their "wage/price spiral" under control.
"I think the next debt bubble could be in the emerging markets. If your economy does slow and if your cost of capital increases, you have a crisis," she added.
China is one of the economies Lazar is most wary of. She says that investors should expect a multi-year period of slower growth to combat headwinds such as ingrained inflation problems, excessive credit growth and a property price bubble.
She says these problems show why the argument for a bull run in China and emerging markets is flawed.
A number of experts have tipped developing markets to surprise on the upside next year because their economies are still growing at a higher level than the western world and because their equity markets are very low on a P/E basis.
Lazar thinks this argument is fatally flawed.
"I would be very cautious of using past equity valuations if economic conditions change, which has happened in the emerging markets. You cannot just say emerging markets are cheap because of historic valuations," she said.
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/People/B/Bakkum_Maarten-Jan_large1.jpg)
"In the financial markets, disaster generally strikes unexpectedly," he said.
"However, the big blow is invariably preceded by warning shots. The anxiety about the forthcoming normalisation of US monetary policy in the markets earlier this year, between May and August, can be viewed as such."
"It hit hard in the emerging world: capital flows swiftly dried up, currency values plunged, both bonds and stocks took a beating and, perhaps most importantly, the blind faith in emerging markets as an investment category was badly dented," he added.
Bakkum says that after Ben Bernanke’s tapering speech in May this year, emerging economies with large current account deficits were the ones that were hit the hardest, such as Brazil, India, Indonesia, Turkey, South Africa and Thailand.
Our data shows that these countries' equity markets slumped dramatically on the back of the announcement.
Performance of indices over 1yr
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/1.%202013_Article_charts_%20&_graphics/20131202_EM_2.png)
Source: FE Analytics
Bakkum says it is worrying that many investors have tried to play down the effect tapering will have on the markets.
"Since then, things have remained reasonably calm and the problem markets have had every opportunity to rectify their vulnerability. The wake-up call was quite clear, but judging by the limited policy measures we have seen so far, evidently not yet clear enough," he explained.
During that time, Bakkum says India, Brazil, Turkey and Indonesia all raised interest rates in order to deal with the issue, which he admits helped to prevent major market turbulence. However, he says more needs to be done to avoid a further, and possibly more dangerous, crisis.
"Ultimately, measures are needed to improve the investment climate and competitive position, including plausible steps to tackle budget deficits, facilitating major investment in infrastructure," Bakkum said.
"Such decision-making is essential, but at the same time, highly sensitive politically."
"With elections coming up next year in Indonesia, Brazil, Turkey and South Africa, it is virtually impossible to do what is necessary. So much has become clear. Meanwhile, the imbalances are growing and, therefore, also the vulnerability of these countries."
Bakkum says that vulnerability could become very apparent when the Fed begins to reduce its asset-purchasing programme.
"There is little or no reduction in current account deficits, despite the lower growth. Inflation is rising further. Once the Fed starts tapering its money creation early next year, the pressure on the emerging world will grow further," he said.
"The damage will ultimately be far greater than it would have been if governments had taken this year’s warning to heart," Bakkum added.
Lazar also says emerging markets will be hit hard when QE tapering begins, as these economies have been some of the biggest beneficiaries of the Fed’s actions.
"Emerging markets have been piggy-backing off our policy, which really shouldn’t happen," she added.