Surviving Bloody Monday In Emerging Markets

October 07, 2008

CIOs say stock carnage points to importance of diligently managing risk and keeping hype touting maturity of developing markets in perspective.

After the bloody sell-off on Monday, the MSCI Emerging Markets Index is now trading at more than a 46% loss for the year.

But not everyone's running for cover. "If anything, we're leaning towards accumulating more emerging markets stocks if prices keep falling," said Jack Payne, chief investment officer at JoycePayne Partners. "Demographically, emerging markets is where most of the incremental world growth is going to take place. This correction might slow the momentum in that direction, but it won't stop it forever."

Another CIO, Roger Nusbaum, recently started buying selected stocks as well as shares of the exchange-traded fund BLDRS Emerging Markets 50 ADR Index (NasdaqGM: ADRE).

"This type of behavior—panic with no fundamental logic—doesn't make sense rationally. But it's something we see over and over in the history of stock markets," said the Phoenix-based CIO at Your Source Financial.

"If you believe a market isn't permanently broken and its price breaks in half, that's a good time to ask whether the time is ripe to reenter that market," added Nusbaum, who recently moved back into emerging markets after some leading indexes had fallen 60% or more from their peak levels a few years ago.

The 50-stock ADRE dropped 7.4% on Monday alone and is down more than 38% this year. With 335 different names, the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) lost nearly the same both on the day and so far in 2008. Another popular diversified fund, the 885-name Vanguard Emerging Markets ETF (NYSEArca: VWO), fell 8.5% on the day and has slipped more than 40% on the year.

BRIC's Role 

So what's new about the latest fallout? China and India led emerging markets' earlier stumbles. Those are two of the so-called BRIC nations that are expected to grow the most over the next 20 years—Brazil, Russia, India and China.

"Now, with the decline in commodities and raw materials prices, the other BRICs have finally started to fall just as hard," said Richard Shaw, president of QVM Group.

In the past 10 trading days entering Monday, Russian stocks had fallen almost 45% and Brazil some 35%. Heading into this week, the iShares MSCI Brazil Index ETF (NYSEArca: EWZ) was down better than 40% on the year. And losses in the Market Vectors Russia ETF (NYSEArca: RSX) had topped 50% in 2008. Both fell in low double digits on Monday.

"There's zero rational behavior going on in the markets right now, so there's certainly justification to cut back a little," said Gary Gordon, president of Pacific Park Financial in Aliso Viejo, Calif. "But it's a little late in the game to bail out completely. Picking a bottom in emerging markets isn't something we'd advise at this point."

Emerging markets are inherently riskier than developed international waters. But many investors have ignored history's lessons, says Nusbaum.

That's not too hard to imagine considering that EEM, the most popular ETF of its kind with $17.2 billion in assets, soared to 30%-plus returns for three straight years beginning in 2005.

"The justification for putting more money into emerging markets has been that somehow they're not going to feel a slowdown in the U.S. as much as they have in the past. But that's turning out to not be correct," said Nusbaum, referring to fundamental views that developing markets had matured to a point where previous boom-and-bust cycles wouldn't be as acute.

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