Let’s talk about the theory of ‘decoupling’. It suggests that emerging economies move independently of developed nations. And we’re now seeing it come into play.
While business cycles in advanced economies do have some impact on emerging economies, this link hasn’t been as strong as usual in current climes. The BRICs, notably China and India, have taken all the measures possible to keep their trade and finance above water - and they’re succeeding.
Take a look at the chart below...
We’ve tracked the Shanghai Composite Index (green line) and Bombay Sensex (orange line) versus the MSCI World Index which covers developed markets (black line), for the year-to-date. You can see how India and China’s stock markets have been hugely outperforming their developed peers this year.
The Shanghai Composite is up by 65%, while the Sensex has logged in 48% worth of gains. Compare this to a tiny 5.7% gain for the world index.
Some emerging markets are crushing their developed peers
Source: Bloomberg
EMs bottomed out in 2008 (circled) whilst developed world markets kept plunging and only bottomed out in March this year. Banking on their own fundamentals to make a comeback, EMs are defying the consensus that the US will be the first to cross the recovery finish line.
Like all global markets, EMs took a dive upon the initial financial collapse. But in what is a first, this year they will account for more than half of the world’s GDP.
Keep in mind that if we see a major pullback in western markets, EMs are likely to get affected too. But if you wait for this correction before ploughing in, you’ll find some prime investment opportunities in emerging markets.
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