SO MUCH for decoupling. In the wake of Lehman Brothers' failure, emerging markets have suffered one of their biggest sell-offs in years. On September 18th Russia's main bourses suspended trading in shares and bonds for a third day in a row after the largest one-day stockmarket fall for a decade; the central bank poured billions into big banks and the money market in a forlorn bid to calm fears. JPMorgan's emerging-markets bond index fell by more than 5% in the week to September 16th, giving up in a few days all the gains it had made this year. Prices of Argentina's credit-default swaps, a gauge of credit risk, rose to their highest-ever level. Unexpectedly, the People's Bank of China cut its benchmark lending rate by 27 basis points on September 15th, to 7.2%, the first cut for six years.

These actions reflected a variety of concerns, such as a darkening economic mood in China and political worries in Russia. But they all have something in common: investors may be changing their minds about emerging markets.

For the past few years, China, Brazil and others, with their high growth rates and large current-account surpluses, began to seem like desirable alternatives to developed markets. For part of last year, the MSCI emerging-markets index was even trading at a higher multiple of earnings than the index of rich-world shares.

That is changing as investors lose their appetite for risk. Merrill Lynch's most recent survey of fund managers found that they are now holding more bonds than normal for the first time in a decade (indicating a flight to safety). They also have smaller positions in emerging-market equities than at any time since 2001. In the past three months, says Michael Hartnett of Merrill Lynch, emerging-market funds have seen an outflow of $26 billion, compared with an inflow of $100 billion in the previous five years.

Reuters

The rouble in the rubble

Falling oil and commodity prices are partly to blame. When these were rising, money poured into Brazil and Russia, which became targets of the “carry trade” (investors borrow in low-yielding currencies and buy high-yielding ones). Now oil prices are falling (dipping almost to $90 a barrel this week), they are undermining the carry trade and forcing Russia to prop up the rouble. Indebted investors are also being forced by their banks to sell as falling prices reduce the value of their collateral.

Lower oil and commodity prices ought to benefit China and India, by lowering import bills and assuaging worries about inflation. Yet India's foreign-exchange reserves fell by $6.5 billion in the first week of September as the central bank sold dollars to slow the fall of the rupee. In China, worries are growing about weakening export demand (growth in export volumes has fallen by almost half over the past year to 11%) and falling property prices, which seem to play a role similar to equity prices elsewhere. In the past three months, property sales in big cities were 40-50% lower than a year ago, according to figures tracked by Paul Cavey of Macquarie Securities. An agent for one of Hong Kong's largest property companies says “confidence ended this week with the fall of Lehman.”

All these countries have the comfort of huge foreign-exchange reserves. On September 16th the new governor of India's central bank said he would continue to cushion the rupee's fall; he also raised the interest rate Indian expatriates can earn on deposits at home and let banks borrow a bit more from the central bank. China's interest-rate cut shows that its government, too, has room for manoeuvre. But the cut will have little direct impact on the economy because lending is limited by quotas. It was intended to boost confidence at a time of falling share and house prices. Too bad that among emerging-market investors, confidence is in short supply.