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Emerging Markets Decoupling?

With stocks — and particularly emerging market stocks — now in a solid, multi-month uptrend, talk of “decoupling” is beginning to be whispered again.  Long dependent on exports to the West, emerging giants such as China and India will instead go a new direction, trading amongst themselves.   This  sounded great in theory — until the subprime crisis in the United States spread around the world.  

Before the the dust settled, East Asia was suffering an economic contraction arguably worse than that of 1998, and countries as remote as Iceland suffered virtual national bankruptcy.   Emerging markets, investors discovered, were still very much “coupled” to developing markets like ill-fated, star-crossed lovers.   

But now, with emerging market stocks enjoying a nice rally, the decoupling talk has resumed.  Consider the FT’s commentary on the phenomenon:  ”The resurgence of emerging markets this year has reignited a beleif in decoupling — the theory that these economies can continue to grow strongly in spite of a sharp slowdown in the developed world.”  

According to the theory, the emerging market consumer is now ready to take the torch from his American cousin.    We find this thought to be as absurd today as it was when we first heard the phrase in late 2006.  Yes, the emerging market consumer is coming of age.  The decades ahead will no doubt see emerging market consumers “catch up” to some extent with their cousins in the United States and Europe.   The problem is, this development will take time, as will the adjustment of the emerging market economies away from the export-driven “Japan model” towards a more sustainable and balanced model.  This will not happen overnight.  It will not happen this year.  It will be a gradual process that happens over the course of several years.  

So, while we agree with the “decoupling” theory over the long-term, we fear that investors will be sorely disappointed in the present.   

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy