Emerging markets (EM) are undergoing long-term shifts that are not favorable to EM equities, according to managers of EM funds. “Things have changed,” says the executive chairman of Franklin Templeton’s emerging-markets group, Mark Mobius. The more than 20% decline in such stocks does not make them a value, based on marcoeconomic indicators. Average expansion in EMs has fallen to below 5% (down from 8% in 2007), placing them just 2.5 percentage points above developed countries (the smallest difference since 2002).

Improvement in equities is not on the horizon. “We’re looking for a long, drawn-out period of subdued economic growth,” says Rashique Rahman, head of EM fixed income at Invesco. EM exports have also stopped growing, due to reduced demand resulting from the Chinese slowdown and subpar recovery in the U.S. and Europe. A report by the Bank of International Settlements identified a half-dozen big EMs with credit-to-GDP ratios associated with “serious banking strains.” EM governments and companies did not, by and large, prepare for slowdown. Chuck Knudsen, EM equity strategist with T. Rowe Price, says that average return on equity and capital has declined for each of the past four years.

There may be niches of value in EM equities. Knudsen points to insurance and food retail; Todd McClone, co-manager of the William Blair Emerging Markets Small Cap Growth fund, identifies pollution-control and alternative energy in China and mortgage lenders and private hospitals in India.

Fixed-income investment in EMs may fare better. Most EM governments appear to have learned fiscal discipline since the last major crisis nearly 20 years ago. Rahman of Invesco notes, “[o]ur base-case scenario is no sovereign defaults among mainstream countries.”