Aug

21

Decoupling: Another Myth Busted

Pete @ 7:38 PM | | Start a Discussion 

The hot story talked about by all the experts last year was the ‘decoupling theory’, that the world will be able to move on and grow stronger with a weaker US economy/stock markets. I guess something has changed.

The following are stories from the financial media related to decoupling theory from the past year.

  • Fed’s Kroszner Says U.S. Economy Not ‘Decoupled’ September 2008
    In a largely academic speech that avoided the topics of inflation and interest rates, Kroszner described several of the ways the U.S. economy is connected to others around the world. He started with a discussion of the way in which financial turmoil in the U.S. spread beyond its borders. “Concerns about financial securities backed by U.S. mortgages spread to asset-backed securities more generally, which led to funding difficulties in European money markets at anything but the shortest maturities,” he said.
  • U.S. and global economies slipping in unison August 2008
    As the United States and many other large economies slip in unison, the reality of integrated markets is being underscored: just as globalization spreads prosperity — linking cotton farmers in Texas to textile mills in China — the same forces spread hurt when times go bad. “The slowdown has reached such a wide range of countries that they’re now feeding on one another,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
  • One in two fund managers feels world about to enter recession August 2008
    The survey, which polled 193 fund managers controlling $611 billion in assets, also found that almost one-quarter believe the global economy is already in recession. Two months ago, just 16 per cent of fund managers took that view. Considering that the managers were polled in early August, it’s reasonable to assume that the figure might be higher again today, considering this week’s wave of gloomy economic data that indicates that four of the world’s five biggest economies - the US, the euro zone, Japan and the UK - are hovering on the brink of recession.
  • Emerging economies can decouple from the US July 2008
    The much-debated decoupling theory had propagated that emerging economies, in particular the BRIC nations, had grown to the point that they were no longer reliant on the US for their future growth. Furthermore, in the event of a slowdown or even a recession in the US, their growth would largely remain insulated or, in other words, they would have decoupled from the US.
  • Asian Stocks Face ‘Substantial’ Headwinds, Julius Baer Says June 2008
    My overall stance still remains very defensive. I think Asia is decoupling but for the wrong reasons, and in fact decoupling for the worst. When we had the opportunity to raise interest rates and allow the currencies appreciate, Asia failed to do so.
  • Europe Preview: German Economy Headed for Trouble? May 2008
    April’s reading was surprisingly weak. ING said the reading was a wake-up call for those who believed in decoupling and thought the “German economy would be able to shrug off the financial crisis and the U.S. slowdown”
  • China growth, inflation slow but remain hot April 2008
    “The economy is still robust. The moderation in growth was mostly engineered by Beijing in fear of inflation instead of being dragged by a weak external demand. Decoupling is in action here in China,” he said.
  • The decoupling debate March 2008
    Many nasty words begin with the letter D: death, disease, depression, debt (when you drown in it) and deflation. “Decoupling”, on the other hand, has a nicer ring to it, even if it is the source of a great deal of controversy. Economists continue to argue about whether or not emerging economies will follow America into recession. The most pessimistic claim that “it makes no sense to talk about decoupling in an era of globalisation”: economies have become more intertwined through trade and finance, which should make business cycles more synchronised, not less. The slide in emerging stockmarkets on Wall Street’s coat-tails appears to endorse their view. Yet recent data suggest decoupling is no myth. Indeed, it may yet save the world economy.
  • Emerging markets may fare better as developed world struggles February 2008
    “What it means is that emerging markets will probably decouple more than most people believe,” said Shanat Patel, global emerging market strategist at Nomura in London. “Exports are much smaller than fixed asset spending but people think an export-led slowdown will slow fixed asset spending quite sharply. That would be the tail wagging the dog.”
  • China, India Posted Sizable Gains for ‘07, But Japan Fell Short January 2008
    Robert Horrocks, head of research at Mirae Asset Global Investments (Hong Kong) Ltd., doesn’t see any danger in Asian stock-market values at a slight premium to world markets, calling it “another sign that decoupling has been gradually accepted as a valid view by the markets.”
  • Investors find shelter in emerging markets December 2007
    Two years ago, you would have been laughed out of school for advancing the so-called “decoupling” theory that developing countries can do relatively well regardless of the fate of the world’s largest economy.
  • Emerging market resilience faces critical test November 2007
    Confident commentary about emerging markets’ resilience to a U.S. recession is being replaced by nervous re-examination of the so-called ‘decoupling theory’. November saw emerging equities lose 15 percent after rising 45 percent year-to-date.
  • Equities rally belies investor concerns October 2007
    Many investors are convinced by the idea that economies in the rest of the world have become decoupled from that of the US: so the US may slow down but the rest of the world will not, helped by growth in developing countries such as China and India.
  • Fed Rate Cut Won’t Make Asian Equities a ‘Buy’ September 2007
    To be sure, things could turn out differently this time. For instance, Asia could “decouple” from the U.S. and continue to grow strongly even as the American economy slows down markedly, or enters a recession. That could make investors more willing to pay a hefty premium to own stocks in the region. Similarly, a Fed rate cut may stoke fresh appetite for risk. That will help emerging-market stocks, including Asian shares.

Vanguard International ETFs

The following are the International ETFs that Vanguard has available to investors. These charts will give us a quick view of the decoupling theory.

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Vanguard Emerging Markets ETF (VWO)

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Vanguard Europe Pacific ETF (VEA)

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Vanguard European ETF (VGK)

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Vanguard FTSE All-World ex-US ETF (VEU)

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Vanguard Pacific ETF (VPL)

As we can see from the tone of the stories in the first section, they have changed their tune and have realized that the United States still makes the financial world go round in good times and bad times.

Now I can see why Teresa gets her ‘news’ from gossip websites and the ‘real market news’ from charts and following sentiment stories.

Makes you wonder which is more important: The National Enquirer or The Wall Street Journal? :)

Charts shown in today’s post have our Relative Momentum Indicator (RMI) and InVivo Universal Stops applied.

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