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Several months ago I posted an article contending that decoupling – the notion that movements in emerging markets correlate minimally, if at all, with those in mature markets – was dead. The vertiginous rise in most emerging market indices over the previous seven or eight years stood in stark contrast to the anemic performance of the S&P 500 over the same period. As the financial meltdown and subsequent recession hit, there was a brief moment when it seemed that many of the emerging markets, especially in Asia and Latin America, might emerge unscathed. Subsequent events indicated that emerging markets, especially in Africa but also Southeast Asia, were suffering as much as the OECD countries, but with much less of a cushion against humanitarian catastrophe. In some parts of Africa, a five per cent drop in GDP can push millions of people into starvation. Decoupling, as I wrote, was dead. Even the miserable Congolese worker scrabbling in the dirt for diamonds or gold or the columbium-tantalite used in cell phones, was hit by the collapse in consumer and industrial demand in America, Europe, Japan, and China.
I may have been wrong. Emerging market stock indices and GDP figures have shot up over the past several months. It appears that the recession in many emerging economies may have been shallower than predicted. Now, it’s possible that relatively buoyant markets in the mature economies have pulled the emerging markets along. Though the Dow Jones and S&P 500 are still down since the beginning of this year, the NASDAQ has risen by nearly 14%. The Nikkei, the Toronto Stock Exchange, and the Australian, Austrian, Belgian, Danish, Dutch, German, Greek, Spanish, and Swedish markets are all up, some by impressive amounts (Denmark 19.1%, Sweden 18.3). Overall, however, the growth is modest. The MSCI developed country index is up just 3.4% since December 31, 2008. This is a much better – and largely unexplained – performance than we had any reason to expect, but it pales beside the MSCI emerging markets index, which has risen nearly 31% over the same period. China is up over 60%, Russia 55%, India nearly 50%, and Brazil 32%, but the phenomenon is not confined to the BRICs. Market indices in Indonesia, Israel, Thailand, Taiwan, Egypt, Colombia, Hungary, Malaysia, Singapore, South Korea, Turkey, and Malaysia have all risen by more than 20% in local currency terms and often much more in US dollar terms. We can ignore Russia and the other big oil exporters like Venezuela and Norway, which have benefited from the run-up in oil prices since the beginning of the year. These other countries, whose economies depend on growth in agriculture, manufacturing, and services, and to a large extent on growth in domestic demand, have shown equally robust growth. Is there a meaningful pattern here, or is it just a statistical blip?
Emerging market returns, of course, tend to be more volatile than those in more mature markets. That is why they tend to produce much higher returns. But I don’t think that is the whole story. I posted an article on this blog a couple of weeks ago, following a business trip to Indonesia and Thailand, in which I speculated that Asia may emerge from the recession well in advance of Europe, Japan, and North America, though it seems that at least some other big emerging markets, especially Brazil, will likely join this vanguard. I have also speculated that the United States, where persistent instability in the financial system, depressed consumer spending, increased business regulation, and huge fiscal deficits as far as the eye can see will prevent it from leading the world out of crisis this time around. But if American consumers are not buying, then countries that depend on exports to the U.S. will need to look to other export markets or to growth in domestic demand. If they can do so successfully, the implications are profound.
It remains to be seen to what extent a rapid recovery in big emerging markets will help pull the rest of us out of the slump. The link between American consumer demand and Asian manufactured exports is well established. It is much harder to predict what effect rapid economic growth and rising consumer demand in countries like Indonesia and China and Brazil will have on production and demand in the United States, but we had better hope it is a significant one. Because if decoupling really is dead, the events of the past year will come to be seen as a mere prelude to a permanent decline in America’s prosperity and position in the world.
This may not be a wholly negative outcome, but that is a subject for a subsequent post.
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