Santa on Stocks: Developed Markets Nice, Emerging Markets Naughty

U.S. investors have to be pleased with the performance of the Dow Jones Industrials (DJINDICES: ^DJI  ) in 2013, with the market up more than 20% amid positive sentiment about the economy. Globally, the Dow was among the best performers in the world, although a few major markets have done a bit better. What's perhaps most surprising, though, is the disparity between markets in the developed world and those in emerging-market countries, as many emerging markets suffered big losses in 2013. Let's take a closer look at the rift and what it means for your investing in 2014.

Lots of presents for Europe and Japan
Among major stock markets, the most impressive performance came from Japan's Nikkei (NIKKEIINDICES: ^NI225  ) , which climbed 47%. For U.S. investors, though, almost half of that gain was wiped out because of the drop in the value of the Japanese yen compared to the U.S. dollar. Many credit the yen's weakness as being the prime motivator for the rally, as a weaker currency supported large gains for Sony (NYSE: SNE  ) , Toyota (NYSE: TM  ) , and other key Japanese export businesses and was part of the nation's economic policy attempts to bolster both economic growth and stock market indexes from decades of poor performance. Sony is up 63% over the past year, while Toyota was up more than 30% and has almost doubled in the past two years. Broadly, even adjusting for the dollar, Japan picked up about 24% in returns for U.S. investors.

Europe also showed substantial signs of life, despite seeing the opposite currency effect as the euro was stronger than the dollar. Markets in Germany, France, Spain, and Italy all rose 10% or more in local currency terms, equating to dollar-gains of 15% to 25%. Even beleaguered Greece put in an impressive performance, gaining more than 30% in dollar terms. With Europe finally starting to come out of recession, stock market investors got a jump on anticipated gains, just as they did in the U.S. four years ago.

Coal for emerging markets
But the global markets weren't kind to all stock investors. Emerging markets once again suffered, with the Vanguard FTSE Emerging Markets ETF (NYSEMKT: VWO  ) falling 4% over the past year.

Among the worst culprits, Brazil suffered major losses of 28% in dollar terms. Sluggish economic growth stemming from weak commodity markets sent Brazilian stocks down in local-currency terms, and a drop in the Brazilian real only exacerbated the losses for U.S. investors.

But Brazil wasn't the only emerging market to suffer. China dropped about 3% after adjusting for currencies, despite a strong recovery during the second half of the year. India's stock market actually rose in rupee terms, but a weak currency sent returns for U.S. investors into negative territory. Resource-dependent Russia saw similar drops of about 7% in dollar terms.

Looking forward, many investors are nervous about emerging markets because of the Federal Reserve's decision to start pulling back on bond-buying activity under quantitative easing. They see emerging markets as having benefited most from high levels of liquidity from the Fed, and as the central bank reverses course, emerging markets have seen the most damage. If that trend continues, we could see 2014 be a year of continued underperformance for emerging stock markets.

What's next for 2014?
Which stock markets will perform best in 2014 is anyone's guess. But with levels of economic activity starting to pick up not just in the U.S. but elsewhere in the world, there should be plenty of opportunities to profit from stocks next year and beyond.

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