The Markets Call “BS” On the Decoupling Argument

One of the primary arguments that the world is in “recovery” comes from the decoupling argument: namely that emerging market economies have grown to the point that they will hold up even if there’s a downturn in the US economy.

For certain, emerging market economies have indeed experienced economic growth and stock market gains far exceeding those of the US and other developed countries. Possibly, the best example of this is Brazil which has seen an inflow of fresh capital from investors looking for greater returns that those proffered by developed nations and increased domestic growth courtesy of commodity prices rising (Brazil is the largest exporter of many commodities).

In simple terms, the fundamentals in Brazil were much better than those in the US in the post-2008 Crash period. As a result of this, the Brazilian market bottomed in November 2008 (compared to March 2009 for the S&P 500), and more than tripled from its market bottom vs. a 95% rally in the S&P 500.

Given this relative strength, many bulls believe that Brazil (and other emerging markets like it) have “decoupled” from the US economy, meaning that these emerging market economies are strong enough to stand on their own two legs and will hold up regardless of what happens in the US.

However, this whole belief came crashing down earlier this year when the Brazilian market first peaked out before falling further than the S&P 500 in this latest market rout: the Brazilian ETF is now 23% off its highs compared to 16% for the S&P 500.

Moreover, Brazil’s growth forecasts have now been lowered for three weeks in a row as inflation soars and the global economy slows. Indeed, even Brazilian economists have noted that the global economy slowing is impacting Brazil:

Forecasts for Brazil’s economic growth are being driven lower by its tighter monetary policy and a slowing global economy, a central bank survey showed on Monday, signaling a steeper-than-expected slowdown is looming.

The central bank survey found that forecasts for economic growth this year fell for a third week to a median 3.84 percent in the week ended Aug. 19.

The situation holds true for China (the emerging market “darling”) as well: the Chinese market is over 20% off its highs and Chinese GDP estimates are falling. So right off the bat we see the “emerging market decoupling” thesis being refuted by both the markets AND mainstream economists.

Indeed, it is quite telling that the S&P 500 has fallen far less than the BRIC markets: the S&P 500 is 16% off its highs, while Brazil is off 23%, Russia is off 22%, China is off 20%, and India is off 28%.

So right off the bat, the “emerging market decoupling” argument falls flat on its face. So scratch that as a reason that the global economy and financial markets will improve in the near future.

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Good Investing!

Graham Summers
Editor In Chief
Gains Pains & Capital






Posted by Phoenix Capital Research