nickecharlese: U.S. investors stuck in emerging markets crunch

Saturday, June 29, 2013

U.S. investors stuck in emerging markets crunch - Howard Gold's No ...

By Howard Gold

Guanabara Bay at daybreak in Rio de Janeiro, Brazil.

NEW YORK (MarketWatch) ? Emerging markets have taken it on the chin this year, but U.S. investors who piled into them are really feeling the pain.

The iShares MSCI Emerging Markets index ETF /quotes/zigman/322623/quotes/nls/eem EEM +0.57% ? has lost 16% of its value since its recent high in January ? and unlike U.S. indexes, which have made all-time highs this year, it?s still a third below its 2007 peak.

That suggests major emerging markets ? especially the popular BRIC countries ? are in a long-term, secular bear market, leaving little hope for investors counting on outsized returns.

Wall Street?s siren song of ?buy where the growth is,? combined with an aversion to an America supposedly in decline, led many U.S. investors to plow recklessly into emerging markets even as they yanked hundreds of billions from U.S. stocks ? which have handily outperformed emerging markets for nearly two years.

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This column warned investors that emerging markets had had their day as early as August 2011, and last April we scratched our heads as U.S. investors continued to pile into these former high flyers.

Read Gold?s analysis of why U.S. investors flocked to emerging markets in MoneyShow.com.

U.S. investors started pouring money into emerging markets during their mid-2000s heyday. But from 2008 through 2012, they bought more than $1 trillion worth of bond funds while also snapping up $77.7 billion of emerging market equity funds, according to the Investment Company Institute.

And yet investors sold nearly $600 billion ? that?s right, $600 billion ? in U.S. equity funds during that same period.

But recently, it?s been a bloodbath, as investors dumped $18 billion in emerging market equity funds over the past 10 weeks, according to Morgan Stanley.

Talk about betting on the wrong horse!

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No doubt they?ve gotten bad advice from Wall Street and independent advisers who urged them to allocate more money to the world?s fastest growing economies. Unfortunately, academic research ? by Jay Ritter at the University of Florida and Elroy Dimson, Paul Marsh and Mike Staunton at the London Business School ? has shown conclusively that faster economic growth doesn?t necessarily produce bigger stock market gains. But I still hear gurus and pundits peddling this tired story.

Also, it must be said, many U.S. investors are in a deep funk about their own country, worried about debt, the U.S. dollar, and the Federal Reserve?s extraordinarily loose monetary policy. That has led them to overinvest in precious metals, foreign currencies and emerging market stocks and bonds while avoiding the U.S. like the plague.

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