Why Emerging Markets Are Falling Faster Than the Dow

Once again, the U.S. stock market managed to recover from an early-morning drop, as the Dow Jones Industrials (DJINDICES: ^DJI  ) even managed to escape with a slight gain of nine points on the day, although it posted a modest loss for the week after four straight weeks of advances. But when you go beyond the U.S. stock market and look more closely at emerging market countries, you'll find a lot more uncertainty -- and more significant declines.

Overall, the most popular emerging market ETFs experienced much sharper declines than the less-than-1% drop the Dow posted this week. Vanguard Emerging Markets (NYSEMKT: VWO  ) and iShares Emerging Markets (NYSEMKT: EEM  ) were both down just under 3% for the week. But when you drill down to look for particular culprits in the emerging markets, you don't have to look very far to find that it was generally a broad-based decline:

In China, more concerns about a slowdown in the manufacturing industry put pressure on stocks. The Shanghai index didn't move much, but one key ETF tracking the Chinese market sank nearly 4% in response to the news, largely on weakness in telecom giant China Mobile (NYSE: CHL  ) , which plays a commanding role in many emerging market-focused ETFs.
  Indian stocks suffered from some of the same macroeconomic issues, with the Bombay market's index down about 3% and ETF tracking the market falling 4% to 5%. The Indian finance minister responded to the decline, which many blamed on Fed Chair Ben Bernanke's comments, by saying, "We think that Bernanke's statement has been misunderstood or misinterpreted." Yet that didn't seem to appease investors in outward-directed industries like Infosys (NYSE: INFY  ) , whose IT offerings require health activity levels not just in India but in the U.S. and other customer-heavy countries as well.
  Stocks in Mexico suffered declines of almost 5%, retracing some ground after an extraordinarily strong stretch of gains on optimism about the country's ability to reinvigorate its economy beyond its core reliance on petroleum and to resolve ongoing conflicts with drug cartels.

But there were some relatively bright spots in other emerging markets. Brazilian stocks were actually up a bit on the week, as the nation found itself better insulated from all the happenings in Asia related to China and Japan. Russian stocks also remained relatively stable, with the Russian market's commodities focus working in its favor this week.

What's next for emerging markets?
One issue that has plagued stock markets in emerging countries is a flight of capital from investors in those countries. As the dollar has strengthened recently, it has reawakened fears of past currency weakness, especially in places like Brazil, where high interest rates and weak currencies are an important part of its economic history. As long as the dollar stays strong, it will deter many investors from getting back into emerging market stocks.

Yet the best thing for investors to remember about emerging markets is that just because you can buy ETFs that own stocks in multiple countries doesn't mean that these markets move in lockstep. More often than not, by picking and choosing the best countries in which to invest, you can do well no matter what happens with broader emerging market indexes. And, best of all, in those markets that are weakening, you just might pick up a bargain in the process.

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