Signs of Life in Emerging Markets?

Gregg Wolper: One of the most welcome developments for many investors so far this year has been the recovery of the Morningstar diversified emerging-markets category. That covers funds that invest around the world in emerging markets, not just one country or region.

Now, last year, 2015, was terrible for emerging-markets funds. Plummeting currencies really hurt them, and also political turmoil and economic weakness in Brazil, one of the biggest emerging markets, really took its toll. This year things have turned around, especially in the past month or so. And there are several reasons; one is the recovery of the currencies. That has a tremendous impact on U.S. investors. And investors around the world who look at emerging markets, they have become more optimistic--not completely rosy, but just a lot better than they were last year. So, the emerging-markets currencies have risen. Brazil's has done very well. South Africa's has done very well. And also the outlook doesn't look quite as dire as it used to. Therefore, the diversified emerging-markets category is actually the second-best performer of all the Morningstar international-stock categories this year. It's not up that much, but it's up, and that's better than the losses in many of the other ones. It's actually better than all of the U.S. stock categories as well--the ones that focus on the style box categories.

Now, not every fund has joined the party so far in 2016. One of the biggest and most successful funds over the years has been American Funds New World. That has not done as well this year and the main reason is, it doesn't invest just in emerging markets. It also has a lot of companies that are in developed markets like the U.S. and Europe that helps them keep up a cushion when things are not going well. But when there is a rally going on, that fund doesn't keep up with the pure emerging-markets funds.