Once sizzling emerging markets have turned bearish

Brazil, Russia, India, China — commonly referred to as the BRICs — and throughout Asia wafted upward into the stratosphere, and investors did what they always do: They chased this hot performance.But over the past two years these once-sizzling markets have turned bearish as all get-out. Emerging markets began to buckle in early 2011, and since then U.S. stock market performance has been far superior to these developing markets.

Since early 2011, the Standard & Poor’s 500 index has gained 41 percent, while the MSCI Emerging Market Index has dropped 12 percent. That’s a 53-percentage-point difference — yowzer — and the pain has continued into this year with emerging markets dropping about 5 percent as the S&P 500 is basically flat.

While the U.S. economy moped along at a dilatory pace, economies in these developing nations grew at almost absurd rates. Economic growth in China, for example, rose above 10 percent compared with a 2 percent pace in the U.S.The BRICs were the sexy investment of that period, but a confluence of factors has soured investor appetite for this asset class.First, explosive growth in the developing world brought fear of inflation, which prompted credit tightening and interest rates to rise, especially in China.

The MSCI Emerging Market Index currently sports a stock price-to-earnings ratio — a common measure of valuation — of only 9.7. In contrast the p/e of the S&P 500 is almost double that at 18.8. It’s next to impossible to predict when an asset class has hit rock bottom, but even at these levels it’s probably still too early to dive into the sector.

In addition to higher interest rates, the other issue overhanging emerging markets involves all the new commodity production capability that has come online since 2005. Capital spending on mining capacity, plants and equipment has exploded in these countries, which means the supply of raw materials should be plentiful in the coming years, and that means prices should remain subdued.“It’s hard to envision emerging market stocks reclaiming leadership against this undertow of excess commodity supply,”