From late 2002 to late 2007, the MSCI index of emerging markets rose five-fold. Then a slide began, which developed into a plunge in the fall of 2008. Through November 2008, that MSCI index was showing a one-year loss of 56 percent and a drop of nearly 45 percent in three months. That was much worse than the recent performance of the U.S. market, as reflected by the S&P 500 index.
Why have emerging markets been hit so hard?
* A flight to quality. Worldwide, investors have been selling assets perceived as risky, such as emerging markets stocks, and moving to assets considered safe, such as cash and U.S. Treasuries.
* Commodities crunch. Emerging markets such as Brazil and Russia are heavily dependent on commodities. As the prices of oil and other raw materials have dropped, so have corporate earnings and stock prices in those countries.
Nevertheless, the basic appeal of emerging markets is still intact. Growth rates are higher in places such as China than they are in developed markets. Throughout the emerging markets, there is a growing middle class, an increase in consumer spending, and more stable economic policies. Thus, emerging markets funds may offer tremendous values now for investors with a long time horizon.