Investors flee emerging markets

NEW YORK – If you think investors in US stocks have had it rough, consider the hapless folks who followed Wall Street’s advice to buy emerging-market stocks.

The MSCI Emerging Markets index has lost 25 percent over the past year, while the most widely held US fund, the Vanguard Total Stock Market index, is down less than 1 percent.

After the financial crisis, plowing money into emerging markets seemed like a sure bet. China was gobbling up raw materials from Brazil, Indonesia and Russia, and their stock markets were soaring. Wall Street cranked up its marketing machine, creating 246 funds to ride the boom.

“Whatever is hot, Wall Street will race out with new products to catch the investor’s eye,” says Larry Swedroe, head of research at Buckingham Asset Management. The blitz worked. In the five years through 2013, investors poured $104 billion into emerging-market stock funds. The amount of money in these funds more than quadrupled.

Now, in classic fashion, investors are reversing course: They’ve yanked $40 billion from emerging-market stocks this year, a record pace of withdrawals, as a slowdown in China has hammered companies that supply raw materials. But the selling has also created real value, some savvy investors say. It costs half as much to buy a dollar of earnings from emerging-market companies now than it does to buy a dollar of earnings from US companies.

The zigzagging fortunes of emerging markets reveal the pitfalls of chasing the hot new thing, and how the best time to buy may be precisely when everyone else is selling.

Betting on emerging markets has never been for the faint of heart. Values soar as money floods in from investors hoping to profit from rapid economic growth. Along comes a crisis, currencies collapse and inflation spikes. Values plummet and money rushes out.

Why they’re falling now: Fear that Chinese demand for Brazilian steel, Indonesian coal, Chilean copper and other goods could slow further. Sliding currencies in these countries squeeze companies trying to pay back loans taken out in dollars. Memories of the 1997 Asian financial crisis aren’t helping. Back then, investors fled Thailand, Indonesia and other Asian tigers, and the fallout threatened to spark a global recession.

Why investors may be wrong: Companies in developing countries have taken out more loans in their own currencies, so they’re better prepared when their currencies fall against the dollar. Manufacturers in South Korea and Taiwan import a lot of raw materials, so they benefit from falling commodity prices.