Emerging markets took a dive as investors worldwide re-evaluated the growth potential of both the U.S. and China, demonstrating that the world is more interconnected than it has ever been.
Mexico, Brazil and the rest of Latin America supply large quantities of raw materials to China and manufacture products to be sold in the U.S. So trouble anywhere can become trouble everywhere.
The ripple effects of the Asian selloff soaked the average emerging-markets fund we rate by a disastrous 6.33% for the five trading days ending Thursday, March 1, 2007. The worst rout for stocks since September 2001 sent even the best- performing emerging-market fund down by nearly 4%.
The worst hit was the highly focused
Indonesia Fund (IF), which has 94.8% of its assets invested in Indonesia, 2.3% in Sinapore, 1.5% in Taiwan and 0.9% in Hong Kong. The holdings with the largest declines were
Bank Internasional Indonesia
, down 10.23%,
PT Astra International
(ASII -- Jakarta), down 7.69%, and
Ramayana Lestari Sentosa
(RALS -- Jakarta), down 7.14%.
With the average stock in the fund's portfolio shedding 2.83% and no stock falling more than 11%, how did the fund lose 12.42%? Well, the net asset value of this fund sank 4.77%, because of larger holdings of the bigger losers. But the price of the fund is set by supply and demand, not just net asset value.
On Thursday Feb. 22, the closed-end fund was selling at an 11.8% premium above its net asset value. Traders continued to sell until a premium of only 2.8% remained. This crushed the price of the fund by 12.42%. Closed-end funds, unlike open-end ones, have a fixed number of shares and trade according to market demands.
The exchange-traded fund suffering the worst decline was the
BLDRS Emerging Markets 50 ADR Index Fund
The index tracks the 50 most actively traded American depositary receipts (ADRs), including
American Movil SA de CV
The average holding lost 8.04% with 12 of the 50 declining by double-digit percentages.
of India was slashed by 13.9% because of growth concerns as India's central bank tightens their money supply.
Investors screamed "mas cerveza" after Latin America's largest beverage company,
Fomento Economico Mexicano
announced 2% lower fourth-quarter net income. This drained off 13.04% of the company's market value.
Fomento Economico Mexicano is also a holding of the
Fidelity Latin America Fund (FLATX), but three other holdings fell more.
Natura Cosmeticos SA
(NATU3 -- Sao Paulo, Brazil) dropped 16.97%. Real-estate developer
(SARHY) and telecom company
( EMT) fell 15.5% and 13.68% respectively.
The fund falling the least from the closing price on Thursday, Feb. 22, to the close on March 1 is the
American Independence International Equity Fund (IMSSX). Down 3.77% for the period, it is now just below break-even so far in 2007 at -0.78%. The fund is open only to the 401(k) plan of
The markets around the world and in the U.S. stabilized after calming words from the current
Chairman Ben Bernanke. This coincided with backpedaling by former Fed Chairman Alan Greenspan saying that a U.S. recession this year was "possible" but not "probable."
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.