Investors in emerging-markets equity funds are getting hit with a one-two punch.

Just weeks after the Russian invasion of Ukraine led to the collapse of that country's stock market, Chinese equities resumed their own slide, leaving many emerging-markets funds down 20% in just the past month.

The recent steep declines in many Chinese stocks come on top of losses in that market going back to last Summer.

"The biggest risks in emerging markets are what I broadly include under the umbrella of political risks," says senior Morningstar analyst Daniel Sotiroff. "At the moment, these types of risk are showing up in a big way."

The average US emerging-markets fund has lost 13.4% in the past month. That includes a 12.9% loss on the largest fund in the emerging-markets Morningstar Category, the $71.7 billion Vanguard Emerging Markets Stock Index VEIEX, and a 20.6% loss on the $33 billion Invesco Developing Markets ODVCX, the fourth-largest of the group.

Behind these losses is the fact that most US emerging-markets stock funds have heavy weightings in Chinese stocks. The average stake is 25%, 5 times the exposure that the typical fund had to Russia a month ago. With trading in Russian stocks halted, many emerging-markets funds have written the value of those holding off as a total loss.

That's been bad news for investors, as Chinese stocks have sold off sharply in recent days amid a growing dispute between Chinese and US regulators that threatens some of the country's best-known companies with delisting from U.S. exchanges. Compounding matters, the omicron coronavirus variant is now hitting Hong Kong and China hard, leading to lockdowns in some of China's biggest industrial cities.

Over the past month, the S&P/BNY Mellon China Select ADR Index, which tracks Chinese companies trading on US exchanges, has fallen 36% through March 14. The Hang Seng China Enterprises Index, which tracks Chinese companies trading on the stock exchange of Hong Kong, lost 24% in the same time frame, reaching levels last seen six years ago. In the past month, Alibaba BABA is down 36% and Tencent TCEHY has lost 32%.

Broad-based, big declines in China stocks

The decline in Chinese stocks been broad-based, with every sector posting negative returns over the past month. By far, consumer cyclical stocks have fallen hardest.

Usually, economic trends drive the performance of cyclical stocks, but lately, regulatory worries have played a major role as well after Chinese regulators cracked down on internet stocks such as Alibaba and Tencent last year.

Among other stocks fuelling the broad China market losses, food delivery services provider Meituan MPNGF lost 38% in the past month. Separately, the Securities and Exchange Commission warned that five Chinese companies--including Yum Brands YUM and ACM Research ACMR--could be delisted from US exchanges in 2024 if they fail to meet certain accounting and disclosure standards.

While China’s economy has grown substantially in recent decades, as a stock investment, any gains have evaporated recently. Over the past decade, the Hang Seng Index is down 16% and the S&P/BNY ADR Index is down 15%. More broadly, the Morningstar Emerging Markets Index has fared better, returning 42% for the past 10 years. But that performance pales in comparison to the U.S. stock market, where the Morningstar U.S. Market Index has returned 254%.

All this matters in a big way to emerging-markets stock fund investors. The indexes against which funds benchmark their portfolio holdings and performance have seen a higher levels of China exposure over the years. For example, the Morningstar Emerging Markets Index has a 30% weight in China, up from 16% 10 years ago and 11% 15 years ago. Today's weight for China is well above the second-largest country weight. Taiwan clocks in at roughly 16%, and India is third at 14.5%

“China’s immense weight hurts diversification in a lot of emerging-markets funds,” says Sotiroff.