David Sterman

Earlier this month, the International Monetary Fund (IMF) released its biannual assessment of the global economy and there were few surprises. The IMF's economists continue to focus on the deep troubles in Europe, the clear headwinds in place for the U.S. economy and the still-impressive resilience of many emerging market economies. So they updated their economic forecasts to reflect these recent global economic trends: "Relative to our April 2012 forecasts, our forecasts for 2013 growth have been revised from 2.0 percent down to 1.5 percent for advanced economies, and from 6 percent down to 5.6 percent for emerging market and developing economies."

Of course, 5.6% economic growth would be very welcome on our shores. To put that in context, the U.S. economy has only grown, on average, at a 2.8% pace during the past 40 years.

Yet that has led to a head-scratching conundrum: Even though emerging markets continue to grow at a faster pace than in the United States, this trend hasn't paid off for investors recently. As I noted back in August, many emerging markets (especially the "BRIC" countries of Brazil, Russia, India and China) have underperformed during the past few years. How could that be?

I may have the answer.

If you dig a little deeper into each emerging market, then you'll find the largest companies in each market are massive, export-oriented firms that rise and fall on the backs of Europe, the United States and Japan. Together, these three countries still account for the bulk of the world's economic activity. In effect, an investment in emerging markets is really an indirect proxy for developed markets.

Even large emerging market companies that have greater local exposure are often still tied to global pricing trends. I'm talking about the commodity producers, major banks and basic materials firms.

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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