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Why Some Emerging Markets Are Suddenly Melting Down

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Vanguard's Norris Maintains Positive Outlook for Emerging Markets

Investors had been enamored with emerging markets for more than two years. These days, they’re not so besotted. For several weeks, money has poured out of developing nations and into the U.S., causing the dollar to rise in value and the currencies of emerging markets to hit new lows. Turkey has been at the center of the rout, but many other countries, including Argentina, Hungary and Indonesia, have been hit as investors dump riskier stocks and bonds for the safety of U.S. assets. For some economists, it raises the specter of the late 1990s-era Asian economic crisis. What’s going on?

The easy answer is that money is fickle and opportunistic -- it goes where it can get the highest return, flowing out of countries as fast as it flows in. This latest upheaval started when the U.S., Japan and Europe kept interest rates close to, or below, zero to help their stagnant economies recover from the 2008 financial crisis. That made returns on stocks and bonds unattractive, and drove investors to developing nations, where the risks were higher but the payoffs more inviting. Emerging markets, as a result, have enjoyed a rally in stocks, bonds and currencies. But the reverse is now happening as investors react to several signals from the U.S. -- faster growth, rising interest rates and a stronger dollar. All three indicate potentially higher returns on U.S. investments and thus act as a magnet for money. They also undermine the attraction of riskier emerging markets. The turmoil in Turkey has especially rattled investors.