MONEY Emerging Markets

Why Stocks in Brazil, Russia, and China are Still Sinking Like a BRIC

With the exception of India, the emerging market's biggest economies are struggling to get back into gear.

Last month’s elections in India kindled hope for reform in the world’s biggest democracy and provided the nation’s stock market with a nice bump.

One thing it couldn’t do is rescue the so-called BRIC funds, which are foreign stock portfolios that target the emerging market’s most influential economies — Brazil, Russia, India, and China. The term “BRIC” was coined in 2001, by then-Goldman Sachs economist Jim O’Neill. During the last decade, when emerging markets rallied, the BRIC story captured investors’ imaginations.

Goldman Sachs, Franklin Templeton, iShares and others rolled out BRIC funds. At their peak in 2010, these investments held more than $4 billion.

But since then performance has tanked.

^SSBR Chart

^SSBR data by YCharts

Over the past five years the Goldman Sachs BRIC Fund GOLDMAN SACHS TST BRIC FD CL A GBRAX 1.1536% version ranks in the 92nd percentile among emerging markets funds, Templeton BRIC TEMPLETON GLOBAL I BRIC FD CL A TABRX 1.3181% ranks in the 99th and the iShares MSCI BRIC ISHARES INC MCSI BRIC INDEX FUND BKF 1.7159% , an ETF, ranks in the 100th. Today investors have just $1.4 billion invested in BRIC funds, according to Morningstar. (The companies didn’t respond to calls for comment by press time.)

What happened?

The story is largely tied to China, which makes up roughly half the market value of BRIC stocks. The world’s second largest economy is no longer growing at a double-digit annual clip. And as a result of financial-crisis-era stimulus, has been dealing with inflation, a housing bubble and declining manufacturing.

Source: MSCI

 

Meanwhile Brazil’s once promising middle-class consumers seem over-extended (casting a cloud over its lavish World Cup spending.)

And as for Russia, well, there was Vladimir Putin’s annexation of Crimea and threats against Ukraine. Enough said.

The lesson for investors isn’t to abandon emerging markets altogether. As a group, these economies will continue to gain ground on the developing world. But the emerging markets themselves are evolving and maturing. No longer can you get away by betting simply on the biggest players.

Investors, in fact, might fare better in a more diversified emerging markets index fund, like Vanguard Emerging Markets Index Fund VANGUARD INTL EQUI EMERGING MARKETS PORTFOLIO VEIEX 1.1079% with exposure to many more emerging economies than just these four. It sounds counterintuitive, but investing in a fund that mixes in smaller (and possibly less economically stable) countries like Indonesia or Thailand might reduce the overall volatility of a foreign stock portfolio that focuses just on the big four BRICs.

Plus, companies in those markets are apt to grow just as fast if not faster than their Chinese or Brazilian counterparts.

MONEY Emerging Markets

Why India’s Stock Market is Soaring

While equities in Brazil, Russia, and China continue to sink like BRICS, India's market and economy are on the road to recovery.

Although the world’s largest democracy has been hobbled by inflation, a declining currency, sub-par growth and difficult business environment, the pro-business Bharatiya Janata Party that just won an epic election in India has engendered optimism that the country can turn around its sagging economic scenario.

It’s time to increase your exposure to India’s stock market.

India’s equity market has been perking up of late, something that can’t be said for the other so-called “BRIC” economies of Brazil, Russia and China, which collectively make up nearly half of the market value of the emerging markets.

^SINU Chart

^SINU data by YCharts

The $1.3 billion WisdomTree India Earnings ETF WISDOMTREE TRUST INDIA EARNINGS FUND EPI 1.4706% , the largest exchange-traded fund investing in Indian stocks, has climbed 22% over the past 12 months through May 29 and is up 26% year-to-date. The fund holds large companies such as Reliance Industries and Tata Motors. It charges annual expenses of 0.83% of assets.

For a play on smaller Indian companies, consider the Market Vectors India Small-Cap ETF MARKET VECTORS ETF INDIA SMALL-CAP INDEX ETF N SCIF 0.0808% , up nearly 31% over the past 12 months and nearly 46% year-to-date. It spots an expense ratio of 0.93% holds stocks such as Ramco Cements and Hexaware Technologies.

Before digging in too deeply, be aware of the risks of investing in India.

* The bureaucratic business environment is tough to navigate, as well as corrupt.

* Stocks listed on Indian exchanges are volatile and will continue to be. The WisdomTree fund’s returns, for example, have been all over the board. After climbing 95% and 20% in 2009 and 2010, respectively, the fund lost 40% in 2011 and 9% last year. This is a reason India shouldn’t dominate your global stock holdings, but represent a “satellite” position that includes other emerging economies.

* The Indian economy is still sluggish relative to its historic standards. In the last fiscal year, economic growth slowed to a 10-year low of 4.5% from a high of 10.4% in 2010, according to The World Bank. If new Prime Minister Narendra Modi can pull off a turnaround, demand will increase for banking services and credit, construction, consumer goods, and vehicles. The Modi-led BJP government may also ramp up trade with China and other growing Asian economies.

* Inflation, hovering around 10%, continues to hamper the Indian economy. The central bank has raised interest rates three times since September 2013. Along with a pronounced drop in the rupee against the U.S. dollar, the country has been stung by the U.S. Federal Reserve’s pullback on its bond-buying stimulus, which had pumped billions into developing nations like India.

Neena Mishra, director of ETF Research for Zacks Investments in Chicago, sees India as a good long-term investment since renowned economist Raghuram Rajan took over as the governor of the central bank of India.

“The central bank has taken a number of positive steps in the past few months, towards bringing down inflation, liberalizing financial markets and strengthening the monetary policy framework,” Mishra says.

Although tangible economic progress seems slow to investors in the West, India’s development and social progress is largely a success story that will accelerate if economic growth picks up.

Growth is expected to increase to nearly 5% in the most recent fiscal year; to almost 6% in the 2014-2015 fiscal year; and 6.5% the following year. If those forecasts prove true, India would trail only China as the largest and fastest-growing developing country.

TIME

That’s-a No Longer My Sauce! Ragu and Bertolli Being Sold for $2.15 billion

Unilever Said to Seek Up to $2 Billion in Ragu Sauce Sale
Unilever's Ragu brand pasta sauce sits on display in a supermarket in Princeton, Illinois, U.S., on Tuesday, March 4, 2014. Daniel Acker—Bloomberg/Getty Images

Unilever sold the two American brands to Japanese condiments giant Mizkan Group, as the Anglo-Dutch conglomerate sharpens its attention on emerging markets

Unilever announced Thursday that it would sell its North American pasta sauce brands, Ragu and Bertolli, to Japanese condiments company Mizkan Group for $2.15 billion.

The deal will transfer ownership of two processing plants in the U.S., one in Owensboro, Kentucky and the other in Stockton, California, to the Japanese condiments giant.

Mizkan’s chairman Kazuhide Nakano called the deal “an important milestone in our global expansion strategy.” The company has a growing stake in North American markets, with the acquisition of World Harbors, a U.S. brand of BBQ sauce and marinades, in 2010 and Border Foods Inc., a U.S. based processor of jalapeño peppers, in 2012.

British-Dutch conglomerate Unilever, meanwhile, has shifted its focus toward emerging markets, where it plans to ramp up sales in higher-margin personal care products.

Kees Kruythoff, president of Unilever North America said in a statement, “This sale represents one of the final steps in reshaping our portfolio in North America to deliver sustainable growth for Unilever, and enables us to sharpen our focus within our foods business.”

 

TIME Nintendo

Nintendo Planning ‘Completely New’ Systems for Emerging Markets

The company's planning to dive into the figurine market dominated by Skylanders and Disney Infinity, too

On the heels of alarming fiscal figures and plummeting Wii U sales, Nintendo says it plans to design and market entirely new game systems which it hopes to sell in emerging markets, Bloomberg reports.

The idea, Nintendo president Satoru Iwata revealed in a new interview, is to bring new gaming concepts to those markets instead of following competitors’ leads and selling less expensive versions of existing platforms.

“We want to make new things, with new thinking rather than a cheaper version of what we currently have,” said Iwata. “The product and price balance must be made from scratch.”

Iwata also indicated that Nintendo hopes to make headway in the highly popular figurine market, currently dominated by Activision’s Skylanders and Disney’s Infinity series, by selling figures based on Nintendo’s stable of iconic characters, like Mario, Zelda and Donkey Kong. The figurines would communicate with Nintendo’s devices using the near field communications (NFC) technology used by the company’s Wii U games console.Nintendo recently announced an NFC device for its portable 3DS system that allows gamers to scan objects with the device and transfer them to the Wii U.

Under pressure by analysts and pundits to engage the smart device market, Iwata also reiterated Nintendo’s position on smartphones. “We have had a console business for 30 years, and I don’t think we can just transfer that over onto a smartphone model,” he said. Iwata also expressed concern that trying to sell games designed for smartphones might harm other aspects of Nintendo’s business, adding that depending on revenue from smart devices “cannot be a pillar” for the company.

[Bloomberg]

MORE: The History of Video Game Consoles – Full

MONEY Investing

Emerging Markets that Merit a Closer Look

Pedestrians walk past a Citibank branch in Mumbai Dhiraj Singh / Bloomberg / Getty Images

Emerging economies have tumbled in unison, yet some have far better prospects than others

The best time to buy something is when it’s on sale.

The place to look for stock bargains may finally be among developing economies, where share prices collectively are down 17% from their recent spring 2011 peak and stocks are trading at an average price/earnings ratio of 10.7 — a 40% discount to shares of developed nations.

Notes Jeff Shen, head of emerging markets at BlackRock: “That’s about the widest spread in more than 15 years.”

True, with risks rising abroad, there are reasons developing-nation stocks are so cheap. China’s growth is slowing, Brazil faces deficits, Russia just annexed Crimea — the list goes on. And as the Federal Reserve tapers bond purchases, global credit is shrinking, which hurts smaller countries dependent on foreign investment.

For those with a discerning eye, however, the recent selloff could spell opportunity.

“Emerging-market nations are no longer monolithic, and some are in pretty good shape,” says T. Rowe Price emerging-markets specialist Todd Henry.

He expects these healthier economies to spur the benchmark MSCI Emerging Markets Index to deliver 11.5% earnings growth in 2014 — more than two percentage points higher than the forecast for the S&P 500 index.

The following strategy will help you identify the most promising areas, while limiting your risks.

Look under the hood

Three trends seem likely to move emerging markets this year:

Asia will deliver solid growth. As China shifts from an economy propelled by exports to one driven by domestic consumption, its expansion is slowing. Yet concerns about stagnation seem overblown, given forecasts for a 7.5% rise in GDP in 2014.

“That’s more than twice as fast as developed nations,” says Justin Leverenz, manager of Oppenheimer Developing Markets, which has a 19% stake in China. Even if China stumbles, Taiwan and South Korea look strong.

“These countries have big current-account surpluses, as well as global trade that isn’t dependent on China,” says Arjun Jayaraman, co-manager of Causeway Emerging Markets.

Scary markets will stay scary. Case in point: Russia, where stocks have fallen 17% this year. Even before the Crimean crisis, Russia’s economy was in a slump, partly from political uncertainty.

“Disruption goes with the emerging-market territory,” says Craig Shaw, co-lead manager of Harding Loevner Emerging Markets. Shaw is sticking with a 6% stake in Russia.

Emerging markets do often rebound sharply before their economies recover. Over the past year, for example, stock prices in Greece, which was demoted to emerging-market status last fall, have jumped 52%, even though its debt problems aren’t resolved. Whether those gains are sustainable if there’s no progress soon is another question.

Think smaller for bigger gains. The least-developed emerging economies — so-called frontier markets, such as Ghana, Estonia, and Vietnam — tend to perform differently from more established markets.

Over the past year, for instance, the MSCI Frontier Index has risen 22.6%. The challenge: It can be tough to get in on the action since these shares tend to be thinly traded and most emerging-markets funds hold only a small stake.

Fine tune with two funds

Given the risks, “most people should put no more than 5% of their overall portfolio into emerging markets,” says Chicago financial planner Mary Deshong-Kinkelaar.

Start with a diversified fund that gives you exposure to all these countries, but maintains a bigger stake in more stable areas. For instance, Vanguard Emerging Markets Stock Index VANGUARD INTL EQUI EMERGING MARKETS PORTFOLIO VEIEX 1.1079% , recommended on our MONEY 50 list, has 23% of its assets in China, 15% in Taiwan, and 5.2% in Russia. T. Rowe Price Emerging Markets ROWE T PRICE INTL EMERGING MKTS STK FD PRMSX 1.0829% , also on the MONEY 50, holds similar country stakes.

Then add a second fund, tilting toward added safety or a riskier bet, as you prefer. Cautious investors might gravitate to Matthews Asian Growth & Income MATTHEWS INTL FDS ASIAN GW&INC INV MACSX 0.2985% , which holds dividend-paying stocks from developed and emerging Asian countries.

Looking for more pop? Add a frontier-market fund, such as Guggenheim Frontier ETF CLAYMORE ETF TST 2 GUGG FRONTIER MARKETS ETF FRN -0.3438% . Just be sure to fasten your seat belt for the inevitably bumpy ride.

TIME Emerging Markets

New Leaders Aren’t Going to Solve India’s and Indonesia’s Problems

General Election Campaign Begins In Indonesia
Indonesian presidential candidate and Jakarta Governor Joko Widodo, center, shakes hands with his supporters after making a speech in Jakarta as the election campaign kicks off on March 16, 2014 The Asahi Shimbun

Hope that economic reform in the two sprawling democracies will be jump-started when new administrations are in power might be misplaced

Rarely has the mere announcement of a candidacy been met by such investor relief. On the day, earlier this month, when Joko Widodo was nominated for President of Indonesia by a major political party, the stock market surged and the currency strengthened. The country had been battered in recent months by nervous investors, but the mere hope that Jokowi, as he is commonly called in Indonesia, will triumph in July’s presidential election gave hope to the business community that much needed reform would progress in the world’s fourth most populous nation.

The situation is similar in India. After years of lackluster reform, the business community is abuzz that the opposition Bharatiya Janata Party (BJP) will likely win general elections starting in April and install the controversial Narendra Modi as Prime Minister. The hope in the world’s second most populous nation is that Modi, a proven economic reformer, will tackle the problems that have caused the economy to stumble.

But is the hope justified? Both Asian giants are badly in need of a jolt of new reforms, and perhaps fresh leadership will spur the effort forward. Yet even if Jokowi and Modi manage to win their elections, there is no guarantee of progress. Both could get entangled in political conflicts that could thwart any attempts at rapid change.

That could be a problem. India and Indonesia are two of the “fragile five” — the emerging economies deemed most vulnerable to the U.S. Federal Reserve’s tapering of its unorthodox stimulus program — and beginning in the summer of 2013, both countries’ currencies have experienced periods of dramatic decline as investors fled.

India is probably in worse shape than before. A do-nothing, Congress-led administration allowed political disagreements to stymie the promarket reform that sparked India’s rapid growth. As a result, the GDP growth rate has shrunk to half what it was just a few years ago. Most desperately, the country needs to cut red tape to prevent the overbearing bureaucracy from smothering investment projects.

The story is similar in Indonesia. After a burst of reform early in his presidency, Susilo Bambang Yudhoyono’s effort got strangled in politics within his coalition. Much like India, Indonesia needs to clear up confusing regulation and improve infrastructure to boost investment and growth.

Can Modi and Jokowi deliver? Jokowi, as the governor of the capital, Jakarta, is known as a man of the people, taking regular jaunts onto the streets to talk with voters and instituting improvements to welfare programs. But running a city — even one as large and unwieldy as Jakarta — and governing the nation are two very different things. As President, Jokowi would have to push reforms through parliament, the members of which will be elected in April. Whatever happens, Indonesia’s parliament will likely be a messy place filled with contending political movements. Also, on national policies, Jokowi has said little, so we just don’t know much about what his policy platform will be.

“We believe that his overall policy bias is likely to be market-friendly, supporting investor confidence,” was the best economists at Barclays could say about him in a recent report.

Modi has a more developed track record. As chief minister of the state of Gujarat, he is credited with engineering an economic “miracle” there with probusiness reforms like streamlining bureaucracy and improving infrastructure. (For more, see my colleague Krista Mahr’s analysis of Modi’s record.) Yet achieving similar results at a national level will be much harder. It is likely that even if the BJP garners the most parliamentary seats in the election, the party may still have to govern in a coalition, raising the possibility that squabbles between its members will block reform as they have done in the current Congress-led government. Nor is it clear that the BJP is any more proreform than Congress, especially when it comes to politically sensitive issues. According to a recent report by Capital Economics, no BJP-governed state — including Modi’s — approved a controversial Congress reform opening up the retail market to multibrand stores. “The BJP’s recent record suggests that it is less committed to progrowth reform than many assume,” the research firm noted.

So in the end, whatever the intentions of Jokowi and Modi, they could get trapped in the same political problems that consumed their predecessors. What it will take to press reform in these two big democracies is some serious political will. We’ll have to wait and see if these two men have it.

TIME

Apple Is Launching a Much Cheaper 8GB iPhone 5c

Apple's iPhone 5c
Apple's iPhone 5c Apple

Apple is adding a lower-cost, lower-capacity 8GB iPhone 5C to its mobile lineup as a tacit admission that its strategy for the 5C—marketed as “for the colorful” in reference to its bright plastic case colors—hasn't worked well

Apple has added a lower-cost, lower-capacity 8GB iPhone 5C to its lineup of phones in Europe. In the UK, an unlocked version of the device costs £429, a difference of £40 from the 16GB model. The model is also available on the French Apple Store. As press time, it was not available on the U.S. Apple Store.

A lower-cost iPhone is a tacit admission that Apple’s strategy with the 5C—marketed as “for the colorful” in reference to its brightly colored plastic case—has not worked as well as the company anticipated. Apple has been under intense pressure to lower the price of its entry-level iPhone in order to expand its market share, especially in developing markets such as China. Wall Street widely expected the ‘C’ in iPhone 5C to stand for ‘cheap,’ but analysts were surprised at the phone’s price when it was released. Traders dinged Apple for the move by knocking $40 billion off the company’s market capitalization the day the 5C was unveiled. Apple CEO Tim Cook admitted in January that he had misjudged demand.

“The fact is, Apple doesn’t know what demand for the iPhone 5C will be in developing markets,” Piper Jaffray’s Gene Munster told Fortune the day the iPhone 5C was unveiled. Rather than give away more margin than necessary, he said, the company decided to start high and make adjustments later. Now, it looks like Apple is making those changes.

Update 9:20 AM: The 8GB iPhone 5C is available in China and Australia as well.

TIME Emerging Markets

Forget the BRICs; Meet the PINEs

University student interns monitor trading at the Philippine Stock Exchange in Manila's Makati financial district
University interns monitor trading at the Philippine Stock Exchange in the financial district of Makati, Philippines, on Feb. 7, 2014 Erik de Castro—Reuters

While many emerging markets are taking a beating, a fantastic growth story in the developing world is widening and drawing in new countries

Emerging markets are taking a beating these days, most of all the famous BRIC economies ­— Brazil, Russia, India and China. These four once seemed poised to dominate a post-American world. Not anymore. Brazil and India are posting growth rates that are only a fraction of what they were a couple of years ago. Russia’s prospects, already hampered by an overbearing state, are unlikely to improve as its aggressive moves into Ukraine could force Europe and the U.S. to impose economic sanctions. Even mighty China, while still notching admirable growth, must confront rising debt and a distorted financial system. The supremacy of the emerging world suddenly seems very far off.

But look past these headline grabbers, and you’ll find other emerging economies continuing to show economic strength. So for now, forget the BRICs; take a look at the PINEs. The PINE economies are the Philippines, Indonesia, Nigeria and Ethiopia. I have to confess I made up this acronym, and I fear it isn’t quite as catchy as BRIC. But I’m trying to make a point here. What the PINEs represent is something very important for the future of the global economy and quest to alleviate poverty. The PINEs are all performing very well right now, and that shows that the advance of emerging economies is far from over. In fact, the fantastic growth story in the developing world is widening and deepening, drawing in countries and regions that had previously been left out.

Take, for instance, the Philippines. When most of East Asia emerged from colonial rule after World War II, the Philippines was considered one of the new countries with the greatest potential for development. Sadly, things didn’t turn out that way. As much of the rest of East Asia zoomed ahead on its economic miracle, the Philippines got left behind. Millions of Filipinos were forced to search for jobs around the world, creating a diaspora from Hong Kong to Dubai. Now, though, the Philippines has become one of the region’s best performers. Even after getting smashed by Typhoon Haiyan last year, GDP still surged by 7.2%, and the IMF expects the country to post similar rates over the next several years.

(MORE: The BRICs Have Hit a Wall)

Indonesia has staged a comeback as well. Though the Southeast Asian giant had been a strong performer in the past (during the early 1990s, for instance), political upheaval and regional conflicts scared off investors, especially after its 1997 financial crisis. But now Indonesia has returned to the ranks of the world’s most desirable emerging economies, thanks to a stable democracy and a burgeoning consumer market. Foreign direct investment increased a hefty 17% last year. Though the stampede from emerging markets after the U.S. Federal Reserve signaled it would scale back its stimulus efforts pummeled the country’s currency, and growth dipped a bit last year, the economy is still forecast to growth at about 6% annually over the next several years.

The strong performances of Nigeria and Ethiopia are even more exciting. Africa generally stood on the sidelines while Asia and other parts of the developing world experienced giant gains in welfare over the past half-century, but now, finally, the continent seems to be joining the party. Nigeria is the largest country in sub-Saharan Africa and has long been seen as a potential economic heavyweight, and now that a more stable government is implementing some much needed reform, investors are flocking into the nation. Ethiopia may be even more exciting. Once synonymous with poverty, peace and strong economic management have turned the nation around. The International Monetary Fund sees growth in the 7% range in the coming years for both countries, and there’s even talk of a group of “lion economies” rising up in the same way the “tigers” of Asia did in the late 20th century.

There are, of course, risks that these countries will falter, if politics or corruption gets in the way. And though the advance of the PINEs may not have the same global impact as the BRICs —­ China and India are so big they’re in a class by themselves —­ the PINEs still represent a major opportunity for international companies to invest, expand and find new customers. The PINEs, after all, have a combined population of about 600 million people. So don’t be too quick to dismiss the emerging-markets story. The meek may yet inherit the world.

MORE: Viewpoint: How Elections Could Impact Five Emerging Economies

TIME Economic Indicators

China Exports Boom Suggests Economic Recovery

Illustration by Alexander Ho for TIME

... if the figures are reliable, that is

Exports and imports in China shot up more than 10% in January compared to the year earlier, calming fears about economic malaise even as it elicited some skepticism about the accuracy of the country’s trade data.

Analysts had expected a 0.1 percent growth in exports from China after a meager 4.3% December year-over-year rise, but the breakout January export rise of 10.6% suggests a recovery of demand among western importing economies, reports The Wall Street Journal. China manufacturing data released last month sparked fears that the country was sliding into a contraction, but the latest export results indicate market strength despite the stifling effect of the Chinese Lunar New Year holiday.

In addition, imports strengthened more than expected in China, with the inflow of goods from commodity producers like Australia and Brazil growing 10% in January.

Chinese businesses have been known to overstate the value of their shipments to bypass China’s strict capital controls, and some analysts expressed doubts about the reliability of the data.

[WSJ]

TIME global economy

Global Investors Got High on Emerging Markets: Now for the Comedown

Pedestrians walk past a Citibank branch in Mumbai Dhiraj Singh / Bloomberg / Getty Images

The world is now paying the price for irrational exuberance over developing economies

You’d think that the world’s investors would be in good spirits right now. The U.S. economy finally appears to be recovering. Japan may be stirring back to life. Both the IMF and World Bank recently upgraded their projections for global growth. But as we get started on 2014, financial markets are in turmoil. Emerging markets from Argentina to Turkey to South Africa are seeing their currencies get slammed as investors flee. The jitters ricocheted to the U.S. last week, pummeling stocks in New York City. What in the world is going on?

Call it coming down off an emerging-markets high. During the Great Recession, when the U.S. and Europe became crushed under debt, joblessness and recession, the developing world appeared to be the future of the global economy. Growth in countries like China, India, Brazil and Indonesia shrugged off the woes of the West and supported the world economy through this toughest of times. Money flowed generously into many of these markets as a result, especially since anxious central banks in the U.S., Europe and Japan flooded their economies with liberal amounts of cash to prevent an even worse downturn. What’s happening now is that global investors are starting to realize the developing world has its own issues, and that it hasn’t detached itself from the West’s problems either. Simply, we’re waking up to the fact that many of the most promising emerging markets are facing difficulties that dim their prospects. The bubble of exuberance that has surrounded the developing world is bursting.

Take a look at China. Though its GDP growth, at 7.7% in 2013, is nothing to sniff at, it is far cry from the double-digit expansion that had been so common, and many economists believe growth will slow further. That’s because its current, investment-obsessed growth model is sputtering and the leadership in Beijing is embarking on a major reform effort to build a new foundation for future success. In fact, a good part of the strong performance China experienced during the downturn was due to a massive surge of credit that has left China burdened with lofty levels of debt. That expansion fueled consumption of everything from iron ore to Prada handbags, but it wasn’t sustainable. Now that Beijing is trying to cool things down, countries that export a lot to China, like Brazil, could see a knock-on effect to their growth as well. Despite warnings from many economists that this was coming, investors only now seem to be adjusting their thinking to a world with a slower China, and that’s affecting their sentiments towards other emerging economies.

(MORE: China’s Economy Is Slowing, and We Should All Be Thankful)

Investors are also coming to realize that many developing nations are facing political pressures that are dragging on growth. India, plagued by political gridlock and distracted by upcoming elections, has allowed the free-market reform that has been driving growth to stall. In Thailand, an ongoing political contest between the ruling party and its opponents is weighing heavily on the economy.

Still other problems have been exacerbated by the global downturn itself. All the cheap dollars spilled out by the U.S. Federal Reserve in its efforts to stimulate the American economy has made it easy for countries like Turkey and India to finance consumption and, in essence, live beyond their means. The fear is that as the Fed scales back that largesse, these countries will have a harder time getting cheap money, and that will drag on their economies. Some companies in emerging markets like Indonesia built up significant amounts of dollar debt that now could become more expensive to service. Those jitters are causing some investors to get out of some of these markets before matters get worse. Perhaps these fears will prove unfounded, but since the cash-creating programs of the world’s major central banks are so unprecedented, the impact of winding them down is uncertain as well.

This isn’t to say that all emerging markets are disasters. The IMF expects Nigeria to grow at a very China-like 7.4% this year, while the Philippines remains surprisingly buoyant. “The real lesson from recent events is that the need for investors to discriminate between individual [emerging markets] has never been greater,” noted research firm Capital Economics in a recent note. Still, while we detox, expect a bumpy ride.

MORE: The BRICs Have Hit a Wall

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser