The return of decoupling

By Felix Salmon
June 4, 2009

John Authers thinks that since emerging-market bourses have outperformed developed-market indices over the course of this stock-market rally, investors are betting on decoupling:

The underlying trend is clear; rightly or wrongly the market believes that China and the other emerging markets will pull the world through.

I don’t think that’s clear at all. Given the degree to which emerging-market stocks underperformed on the way down, it’s only natural for them to outperform on the way up.

Emerging-market stocks are high-beta assets, and in times of general volatility, as we’ve seen over the past couple of years, they exhibit really high volatility. You need a strong stomach to invest in them, and you’re likely to get whipsawed quite a lot. But as a result, trying to extrapolate a big-picture global macroeconomic forecast from a relatively short-term movement in emerging-market stock indices is a fool’s game. I don’t think that EM stocks have ever been good forecasters of anything; there’s certainly no reason to believe they’re demonstrating something in particular right now.


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“We have heard the emerging markets decoupling story before. But this time there is a difference – the markets really seem to believe it.”

What was it before? An urban legend? Gossip about a couple breaking up? Who’s ‘we’? Shouldn’t he tell us where he heard this story before? And now? Was it one of the attorneys for one of the members of the couple?

“So the market really has faith in decoupling this time. Does it have too much faith?”

Now it sounds more like a creed or a hope.

“Disquieting signs, such as the failure of US financial stocks to make any gain since the stress test results came out a month ago, suggest all is not well.”

Now it’s a failed promise or a bad meal.

“But the underlying trend is clear; rightly or wrongly the market believes that China and the other emerging markets will pull the world through.”

Why isn’t the trend clear? How did we go from “seem” to “believe” in this short post?

I like Authers. I think that he was actually having a bit of fun about decoupling in this post.

“But suddenly, in late October, they hit a bottom and started to rise.”

His point is about how silly this decoupling talk sounds. Namely,it has a portentous quality unjustified by the facts. Of course, I thought that “The Homecoming” was a comedy.


Decoupling is bunk, but the relative ourperformance of emerging markets is real. I have analyzed this in my blog (please dont take this as a shameless plug). Here is the gist: This decade (starting Jan 2001), emerging markets have retunred 10+%, annualized, whereas S&P has returned -3%, annualized. Interestingly, emerging markets bottomed in November and S&P in March 2009. Lastly, a volatility adjusted portfolio of long EM versus short S&p would have made money in 2008!