Issue 32 • JULY 8, 2009 The Return of the Decoupling Debate
Then came the global credit crisis and emerging markets — especially the BRICs — fell from grace … and fell quite hard. The MSCI Emerging Market Index plunged a record -58% last year as the global crisis swiftly re-coupled all financial markets.1 But so far this year, emerging markets have enjoyed a spectacular reversal of fortune, rebounding +35% in the first half of 2009, compared to a +2.9% advance for the MSCI World Index.2 So, are emerging markets finally decoupling from developed markets like the U.S., Japan, and Germany? And can these robust gains last?
For instance, developing economies are expected to post economic GROWTH of +1.6% as a group this year, and +4% in 2010, according to a recent report by the International Monetary Fund. This contrasts sharply with a -3.8% CONTRACTION forecast for developed economies in 2009, with ZERO growth forecast in 2010.3 Indeed, China’s economy may grow nearly +9% this year, while India expands about +8%.4 This robust growth forecast is certainly reflected in the growing influence the emerging markets have on global equity prices. The 22 nations in MSCI’s Emerging Market Index comprised 24% of total world market capitalization at the end of June, up from just 18% at the start of the year, and the highest since records began in 2003.5 China’s total market capitalization, for example, has jumped more than five-fold since the end of 2003, in spite of the big decline last year … while the U.S. S&P 500 has basically gone nowhere since then.6 Sure, China’s economy — now the third largest in the world is still heavily dependent on exports. With its best customers in the U.S. and Europe in a deep slump, it’s no surprise that China’s exports have taken a big hit. But China has taken steps, even faster than U.S. or European authorities, to jump start domestic demand, including a $585 billion stimulus package aimed mainly at domestic infrastructure projects. China’s central bank has also cut its benchmark lending rate five times in the last four months of 2008. The Shanghai stock market responded with a gain of +70% thus far this year. India and Brazil have also deployed fiscal stimulus measures and slashed interest rates. Their stock markets are also responding with stronger gains than in developed markets.7 The bottom line is that emerging economies, including China, came into the credit crisis in a very strong financial position. All of the BRICs have large capital reserves and can afford to stimulate their economies out of savings accumulated during the boom years, rather than being forced to resort to massive deficit spending, as in the U.S. Jim O’Neill, chief economist at Goldman Sachs is a true believer in decoupling. Goldman first coined the BRIC acronym in 2001, and today O’Neill still expects China and India to grow strongly in spite of the global recession due to a “structural shift in the world economy.” This should allow the emerging world to enjoy continued growth in domestic consumption, even while U.S. consumers slow spending to boost savings and pay down debt. “Over the next five years,” says O’Neill, “there is a genuine chance that both China and India could show domestic demand growth of 10 percent.”8 While these forecasts remain to be seen, there is no doubt that emerging markets have been a good place to be invested in recent years. Over the past five years alone, the MSCI BRIC Index gained an average of +20.4% per year and the Emerging Market Index advanced about +12% annually, while U.S. markets have gone backward.9 There also seems to be little doubt that emerging markets, while more volatile, also enjoy better long-term growth prospects than indebted developed nations. At Weiss Capital Management, several of our managed account strategies currently hold positions in emerging markets. Putting the decoupling debate aside, we believe these markets can offer strong upside potential for investors in the years to come. Good investing, 1 Bloomberg: Emerging Markets Take Record Share of World Equity, 7/3/09 Disclaimers: 1. Weiss Advice is a publication of Weiss Capital Management, an SEC Registered Investment Adviser. Weiss Research is a separate, but affiliated publishing company. Both entities are owned by Weiss Group, LLC. 2. "Weiss Advice" is published for general information and educational purposes only and should not be construed as a specific recommendation to buy or sell any security. Specific recommendations can only be given to advisory clients of Weiss Capital Management, with the benefit of knowing their financial condition and suitability. Receipt of this publication should not be construed as a solicitation to do business outside the jurisdiction for which the Firm is approved. Currently, Weiss Capital Management offers investment advisory services to individuals maintaining legal residency within the United States. For details, please contact the Firm. View Weiss Capital Management's Privacy Policy. To make sure you don't miss our urgent updates, add Weiss Advice to your address book. Just follow these simple steps. |
During the late, great cyclical bull market from 2002 to 2007, emerging markets were among the best performing asset classes by far. Particularly appealing were the fabled BRICs (Brazil, Russia, India and China) … the four horsemen that pulled the emerging market chariot.
The concept of emerging market decoupling has been hotly debated of late. The recent resurgence of emerging market stocks has again pushed this argument front and center. To a large extent, the emerging markets — led by the BRICs — are in the process of decoupling from the developed world … at least in an economic sense.
