LONDON After the dotcom bubble and the global credit crunch, it's the turn of the emerging markets industry to sink into post-boom soul searching.
The near mania that once flabbergasted even emerging market specialists is gone. Now many of the firms that grew to serve investors in the likes of China, Brazil or South Africa are slashing their businesses and jobs, with more cuts to come.
If proof were needed that global investors have gone off developing economies, it came in Tuesday's announcement by Barclays that it is pulling out of Africa after more than a century.
The British bank's African subsidiary insisted the decision to withdraw under a makeover of the London-based parent did not relate to economic sentiment on the continent.
But sentiment among investors in emerging markets generally has been souring for some time; in dollar terms, emerging equities underperformed their developed peers by around 50 percent in the five years from the end of 2010.
Compare that with the mood just before the market peaked half a dozen years ago.
More adventurous investors had long poured into emerging markets (EM) - especially countries exporting then booming commodities - seeking better returns than in developed economies where interest rates were near rock-bottom. But to the astonishment of market professionals, even some pension fund managers - the traditionally ultra-conservative guardians of people's retirement incomes - wanted to join them.
Devan Kaloo, head of emerging equities at Aberdeen Asset Management, recalls a conversation he had with a European pension fund in 2010: it wanted to put no less than 80 percent of its assets into a sector that a few years earlier had been considered too risky for mainstream investors.
"I am an EM guy and I should have been jumping up and down and saying 'yes absolutely' but even I was thinking: 'seriously'?" he said.
Kaloo advised against such a move, and the conversation with his fund at least went no further. "I just hope they didn't do it," he added.
Kaloo runs one of the sector's most successful funds; it delivered average annual returns of almost 20 percent in the decade after its 2003 launch, far outpacing the underlying emerging index. But some time after the 2010 conversation, Kaloo "soft-closed" his fund - not marketing it and charging new investors extra fees upon entry.
"EM became so much in vogue that we had investors coming to us who perhaps didn't understand the asset class; they looked at our track record and extrapolated that forward. We wanted to rebalance the book and to better cherry-pick clients," he said.
Little did they know but emerging equities' boom decade was drawing to a close. Having risen more than 200 percent from 2001, the main index run by MSCI fell 35 percent in the subsequent five years.
Kaloo's fund has not been spared as investors fled the problems of emerging markets - such as diving oil prices for energy producers from Nigeria to Russia or political infighting in the likes of South Africa - and returned to developed markets in the hope of reviving returns.
Its assets under management (AUM) are down to $5.1 billion from $16 billion in 2013. Aberdeen Asset Management's overall AUM fell by $30 billion last year, mainly due to its EM-heavy profile.
Across the industry, $26 billion fled emerging equity funds last year, according to Boston-based EPFR Global, a sizeable chunk of the net $153 billion inflows received between 1996 when data tracking began and now.
Most of this is down to small investors but the downturn is also testing the patience of pension and insurance funds, mostly late arrivals to the EM party who had been lured by the juicy returns earlier entrants enjoyed.
The losses go beyond equities. EM debt funds tracked by EPFR suffered $32 billion in redemptions last year; more emerging market bond funds closed than were launched in 2015, according to Lipper, the first time this has happened since it began compiling data in 2006.
On top of investors themselves, their advisers have also become cautious. "There is what I call double risk aversion – there is natural risk aversion, plus the financial adviser has an increased risk of being fired," said Peter Preisler, head of global investment services for Europe, Middle East and Africa at T. Rowe Price.
More pain probably lies ahead because it usually takes at least 8-10 quarters of negative returns to affect the bigger, diversified funds seriously, says Shiv Taneja, principal at Market Metrics, which provides data to the asset management industry, adding that there was still "fat in the system".
Global banks, struggling with sluggish home economies, had fanned out across the world in anticipation of dealmaking and research fees. Hopes were also pinned on mortgage and credit card sales to the millions of Brazilians, Nigerians and Indians who were expected to join the middle classes.
This paid off for a while, particularly with underwriting new share sales (IPOs) in the developing world.
With jumbo deals such as Agricultural Bank of China's $22 billion IPO and Santander's $9 billion Brazilian debut, equity bankers' fees topped $6.3 billion in 2010, a six-fold rise from 2000, ThomsonReuters data shows. This fell to $4 billion in 2015, or $1.2 billion if China is excluded.
The shift is forcing lenders to retreat, closing offices overseas and routing activity back through London or New York.
Global job cuts just between June and December last year amounted to 130,000 at the top 10 European banks, double the 2013 and 2014 losses, according to data compiled by Reuters. Much of this centres on emerging markets business.
Barclays, for instance, is also selling its Asian private wealth business and radically cutting its investment banking operations across emerging markets.
Promising overseas ventures have soured; at Standard Chartered, balance sheets have been dented by rising loan losses in India, once a highly profitable market. The bank, which plans to axe 15,000 jobs, has just posted its first annual loss since 1989.
Amid the general jobs carnage, it is hard to quantify losses specifically on emerging market trading desks. But data from Coalition, an industry analytics firm, offers clues. Based on reporting by the top 10 global investment banks, it estimates Eastern European, African and Middle Eastern bond and currency trading desks are down over a hundred personnel since 2012.
"A huge industry grew up around EM but the mistake people made was in thinking the story was secular, rather than cyclical," said John-Paul Smith, founder of the Eclectic Strategy investment consultancy.
Smith, who has worked as a fund manager at Pictet and in equity strategy at Deutsche, called the end of the emerging equity cycle in December 2010, advising clients to sell. Some fund managers emailed to ask if he was joking, he recalled.
Consultants who urged pension funds and insurers to diversify into emerging markets just as the boom peaked are also to blame, he said.
GOOD, BAD, UGLY
One problem is that anticipated improvements in public and corporate governance did not happen in emerging markets and most such countries made little effort to reduce their dependence on exports of commodities, prices of which are plunging.
Late last year, Martin Taylor, founder of the $1.5 billion Nevsky Capital hedge fund, closed his vehicle, telling clients the decision was partly because economic data from countries such as China and India had become "less transparent and truthful", complicating investment decisions.
Many also blame the nature of the emerging markets class which lumps together disparate countries into indexes used by funds to guide investment and benchmark performance. This can mean emerging markets - good and bad alike - tend to rise and fall as a bloc.
Kaloo said even well-managed, profitable companies in emerging markets are now being punished.
Investors do seem to be differentiating more between countries, said Greg Saichin, head of emerging debt at Allianz, but the benchmarks still unite "the good, bad and ugly".
Saichin reckons flexible strategies not tightly tied to the benchmarks are the way forward.
"Emerging markets rode high on back of the commodity super-cycle and monetary accommodation, no questions asked," he said. "But now people are asking questions."
(Additional reporting by Claire Milhench in London and Sumeet Chatterjee in Mumbai; editing by David Stamp)
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