as part of our
It seems like an eternity ago, but about four years ago the
was abuzz with a new catchphrase: decoupling.
Western economies and Japan were in bad shape. No one yet knew
just how bad the 2008 meltdown would be, but at the very least it
appeared that growth in the developed world would slow. Emerging
markets, however, still looked healthy. Under the decoupling
argument, emerging markets were ready to untether themselves from
the debt-burdened West and find their own way in the world.
Emerging market stocks would continue their bull market, even if
American and European stocks were flat or down.
Let's just say it didn't work out that way. Emerging market
stocks, as measured by the iShares MSCI Emerging Markets ETF
($EEM) lost over 60% of their value in the bloodletting that
followed (between late '07 and early '09 ), falling harder and
faster than their developed peers.
There were two major flaws in the decoupling argument. First,
fundamentally, most of the major emerging market economies (and
most notably China) depend disproportionately on exports to the
West. How, exactly, were emerging markets to continue humming along
when their customers abroad weren't buying?
Secondly, correlations among global equities have risen in
recent decades as capital markets have become more integrated. For
a host of reasons - the rise of ETFs that bundle stocks together,
the dependence on leverage that forces managers to liquidate
quickly to cover losses, or that bogeyman of all bogeymen:
Algorithmic trading - formerly uncorrelated markets tend to rise
and fall together now.
Why do I bring this up now? Because I'm starting to see the same
arguments again today.
This week the Financial Times wrote that "Money has poured into
emerging markets this year, with funds dedicated to the asset class
enjoying their best start to a year since 2006 amid continued
investor wariness over developed markets."
Emerging market stocks, bonds and currencies have all had a
fantastic start to the year. EEM is up over 15 percent
year-to-date, roughly double the return on the
. But there lies an important point: though emerging markets have
outperformed their developed market peers, they are very much
moving the same direction.
In the "risk on/risk off" market that has dominated since the
onset of the crisis, we are now in "risk on" mode. Virtually all
risky asset classes - equities of all stripes, commodities,
non-Treasury bonds, etc. - are enjoying a rally.
The good news is that I expect this to continue through the
first half of 2012. After a year of running for the bunkers,
investors have finally recovered their risk appetites. Meanwhile,
stock prices - and particularly emerging market stock prices - are
attractive, and the monetary conditions are loose. The pieces are
in place for a tradable, multi-month rally. More speculative
sectors like emerging markets should be the best performers.
The bad news, of course, is that all of this goes out the window
if Europe's debt crisis takes a turn for the worse. Emerging market
equities have not decoupled from Western markets, and I don't
expect that they will in my lifetime. When global capital markets
are integrated, we all sink or swim together.