Global gut check

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Run Screaming from Emerging Markets Right Now

All eyes are on Asia right now, what with the gut-wrenching drop in the Nikkei and the continued slowdown in China.

But the global growth story — or should I say struggle — is much more than what’s going on in these big players, or even in the U.S. and Europe. It’s about emerging markets, and how many regions that should be high-growth are turning into slow-growth … or even no-growth.

Here are just some of the ugly items investors have had to deal with:

So what’s the reason for this emerging-market rout, and what does it mean for investors? The biggest reason for the declines, in a nutshell, is currency volatility.

U.S. interest rates on Treasuries have actually pushed into decent territory, with the yield on the 10-year touching 2.29% recently — its highest level in over a year. That, coupled with posturing by the Fed that implies tighter monetary policy in the next year or two, means a stronger dollar.

Money is flowing into the U.S. as a result — because hey, in this challenging environment, a yield of that size looks decent. And where is that money coming from? From any number of places that seemed like a better alternative several months ago. Thailand. The Philippines. Turkey.

In other words, the struggles in the U.S. and the low-interest-rate environment pushed cash abroad. But now that cash is coming back home, and emerging markets are feeling the pain as a result.

Bake in the China slowdown that is dragging down commodities because of lower demand, and you have a recipe for EM disaster. Emerging markets obviously lack high-tech or consumer-driven economies, and make a lot of their cash in industries like energy or mining or agriculture — so a crash in commodity prices hurts them the most.

The “good” news, if there is any, is that the turmoil abroad means a flight into U.S. equities for stability and dividends. And, of course, Treasuries could tick even higher and provide (for once) a decent income investment that outpaces inflation.

But that’s cold comfort if you are sitting on deep losses in emerging markets … or if you want something a little sexier than 2.5% returns in T-Notes.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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