Why Emerging Markets Are Getting Crushed

For years developing countries have been thrice blessed. First, near-zero interest rates in the U.S. drove investors into bourses from Mumbai to Mexico as they searched for higher returns. Next, China emerged as the trading partner of choice as it gobbled up Indonesian palm oil, Cambodian hardwoods, and Brazilian iron ore. Finally, with the exception of the Middle East, the politics of most emerging-market countries were stable.

The blessings have run out. In the eight weeks through July 17 investors pulled $40.3 billion from emerging-market bond and equity funds amid signs that the U.S. Federal Reserve may start scaling back its stimulus effort. At roughly the same time, massive demonstrations in Turkey, Brazil, and Egypt shook the foundations of power in those countries. Adding to the turmoil is a slowdown in China that’s affecting exports, from coal to copper to potash.