Emerging market déjà vu

Funds are sinking like it’s 1998

Fifteen years after an emerging markets currency crisis rocked the financial world, those markets are melting down again, slashing returns from the sector’s mutual funds.

Emerging markets, such as Brazil and India, have seen stocks tumble this year as their economies weakened and their currencies’ value against the dollar fell. And that, in turn, has made the value of emerging markets stock funds fall like bricks.

According to Lipper, the average emerging markets fund has fallen 10%, but many individual funds have fallen far more. For example:

IShares MSCI Turkey, down 26% so far this year, thanks to the increasingly precarious political situation in Turkey and civil war in Syria.

Market Vectors Brazil SmallCap fund, down 29.7%, crushed by rising interest rates and falling currency values.

Dreyfus India fund has plunged 50%. The Indian rupee has weakened significantly against the dollar, though it strengthened on Thursday.

India’s central bank has been nudging interest rates higher to attract investor money into the country, but that strategy, in turn, has hurt the already struggling Indian economy. Rising interest rates make it more costly for Indian companies to borrow and expand, and the falling value of the rupee means that imports — such as crude oil and fertilizer — are more expensive.

Are we poised for a repeat of 1998 — or worse? Fifteen years ago, a currency crisis swept through emerging markets — particularly Asian ones — sending U. S. markets into a short, sharp decline that sent the Dow Jones industrial average down 19% the final six months of 1998.

Most emerging markets have less debt than they did then, which may help buffer against a sequel. Still, a recent Bank of America research note says that the rupee could fall as much as 70% against the U. S. dollar. And any further slowdown in China, the engine of much of Asia’s growth, could spell further declines in emerging Asian markets.

For those who like venturing out to the end of the branch, not all emerging markets funds have been decimated.

Market Vectors Gulf States ETF, for example, has gained 21.7% this year, thanks to rising oil prices. And some funds that invest in Chinese small- company stocks have risen smartly. PowerShares Golden Dragon China fund, for example, has gained 34.5% this year.

FAROOQ KHAN, EPA A weaker Indian rupee means that imports — such as crude oil and fertilizer — are more expensive.