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December 01, 2008 at 02:00 AM
It wasn’t supposed to be like this.
Emerging market stocks were supposed be the future of capital growth. They were a source of spectacular gains. In fact, they were so invincible it was believed by some they were disconnected from the problems facing developed economies in Asia, Europe and the United States.
As it turns out, emerging markets are far more intertwined with the rest of the world than many of us realized.
From 2003 to mid-2008, the MSCI emerging markets index enjoyed annualized gains of 29.75 percent and outpaced U.S. stocks by a wide margin. Investors couldn’t get enough. Back then, stocks from emerging economies led on the way up. Today, they’re leading on the way down.
Broadly diversified funds like Vanguard’s Emerging Markets ETF (VWO) and iShares Emerging Markets ETF (EEM) have lost about half their value this year. And ETFs following single emerging market countries have fallen about the same or more.
Emerging markets usually refers to countries whose financial markets and economies are still in development mode. Let’s take a quick gander at what some of the world’s largest emerging economies have been up to.
Brazil Major South American financial institutions like Banco do Brasil, Banco Bradesco and Itau haven’t been spared from the global financial meltdown. Also, falling commodity prices and the prospects of a worldwide recession have many large commodity producers worried. The iShares MSCI Brazil ETF (EWZ) is down 49.5 percent this year.
ChinaChina’s economy is slowing down much faster than analysts had predicted. While its financial system hasn’t been hit as hard as those of Europe and the U.S., the global financial turmoil has dampened demand for its exports. China’s central bank cut the benchmark one-year lending rate to 0.27 percent.
