It certainly wasn’t a pretty day of trading in the US, but if you think it’s bad here, look no further than the carnage in emerging markets. While the major US equity indices were down 1% today, the ETF that tracks emerging markets (EEM) was down 2.5%. Today’s weakness in emerging markets is a continuation of a broader trend that began all the way back in 2010. The chart below shows the relative strength of the emerging markets ETF (EEM) versus the S&P 500 tracking ETF (SPY). In the chart, a rising line indicates that emerging markets are outperforming while a falling line indicates US outperformance. In the years leading up to 2010, EEM outperformed SPY by a wide margin. Then in late 2010, the relationship between the two ETFs abruptly reversed and EEM began a period of steady underperformance. Following the recent declines in emerging market equities, EEM has now given up all of the outperformance it built up between 2004 and 2010.
In the run-up in emerging markets during the last decade, one of the poster children for the sector was Brazil. Like the rest of the emerging market area, though, Brazil has fallen on hard times. In late 2009, the company was awarded the 2016 Summer Olympics, which was heralded as bullish for its economy and a sign of more good things to come. Looking back on that news, though, Brazil being awarded the 2016 Summer Olympics was closer to a top. Just over a year later, the Ibovespa stock index peaked, and it’s now down more than 20% from where it traded when it was awarded the Olympics. At the same time, the 2016 Summer Olympics — which were supposed to represent Brazil’s emergence on the world stage — have been riddled with corruption, cost overruns, and concerns over athlete safety due to pollution.
The performance of Brazil’s Ibovespa in the chart above doesn’t even tell half of the story of the pain that US investors have endured being bullish on Brazil. In fact, it barely even tells a third of the story. The chart below shows the performance of the Ibovespa index adjusted for the decline in the Brazilian Real versus the dollar in the same time period. After accounting for currency depreciation, an American who bought the Ibovespa is down close to 60%! That puts it within 9% of taking out the bear market lows from the financial crisis. Not too long ago, the term lost decade was frequently attributed to the US. Nowadays, it is Brazil and the rest of the emerging market area that are well into what has been their own lost decade. Ironically enough, just after we posted this, Brazil’s credit rating was downgraded by Moody’s.