Insight: Decoupling gives way to recoupling

FT ^ | 02/25/08 | Jim O’Neill

[TigerLikesRooster]

Insight: Decoupling gives way to recoupling

By Jim O’Neill

Published: February 25 2008 17:01 | Last updated: February 25 2008 17:01

We have completed seven full weeks of 2008. At the close of business on Friday, many stock markets around the world, including some of the best performers of 2006 and 2007, had dropped much more than the US, whether developed or developing.

For example, the previously high-flying DAX was down 15.6 per cent, virtually double the year-to-date decline in the S&P 500. So are both the high-flyers of the previous two years, China and India.

Brazil, the cheapest valued BRIC (Brazil, Russia, India, China) with the best improving economy of them cyclically, is up slightly, as are some of the N11 markets, such as Egypt, Nigeria and even Pakistan. N11 is our definition of the “next eleven largest emerging economies in terms of potential” as defined by their population size.

Yet 90 per cent of the clients I engage with are spellbound by the US recession risk and the endless saga of the “next shoe to drop” in the credit crisis.

As we have argued since December, it is time to consider “recoupling” as opposed to “decoupling”.

We were major advocates of the decoupling notion in 2006 and 2007, linked to our optimism about the rise of our beloved BRICs and the structural opportunities that would arise.

Now, decoupling and such phrases have all sorts of conceptual issues with them. But in those years, it struck us as a good way to capture the likely slowdown in the US housing market, the shift of US monetary policy to an eventual easing, and the ability of the China-led BRICs story to help the rest of the world soften the impact of US weakness.

By and large, this played out in most financial markets, with US stocks underperfoming many others, interest rate differentials narrowing, commodity prices soaring and, of course, the dollar weakening against an ever widening range of currencies.

But now, what is left for decoupling? Japan never managed to really decouple from the US. For others, decoupling from the US was to some extent sustainable only so long as the US slowdown was not too severe, and most crucially China was firing on all cylinders.

But can decoupling take place when China is looking a bit less vibrant? Can other countries decouple from the US when US policymakers have woken up to their challenges, and when they have come up with – and are implementing – one of the biggest economic stimulus packages in modern history?

The one per cent of GDP fiscal stimulus on top of the Fed’s indirect deliberate steepening of the US yield curve suggests investors need to be careful about becoming excessively bearish on the US relative to elsewhere.

As markets, as opposed to market chatter, are showing, it might be wise to think the opposite.

Even the US dollar, which still suffers from overwhelmingly negative media coverage, has performed better than most major currencies since January, especially sterling and the Canadian dollar.

Indeed, perhaps with the important exception of the renminbi, it is tough to see the bearish case for the dollar any more against any major currency.

What about China?

We think, for the first time since the Asian crisis in 1997, that China might surprise slightly – emphasis slightly – on the downside. By finally accelerating the speed of its currency appreciation, and persisting with other tightening measures, China may be on the verge of slowing real GDP growth below 10 per cent, something which now seems necessary to help bring inflation under control.

There is some, albeit mixed, evidence of this already, with exports and investment spending showing softer tones. India is also showing pretty clear signs of having come off the boil.

So what is going to help decoupling for others?

There remains a mood among many, including some European policymakers, that they can be immune from the US slowing, as has been the typical assumption in the past.

However, if China does slow somewhat, this is going to be harder to sustain. Maybe the US is going to “decouple” from the rest.

[TigerLikesRooster]

Ping!

[jiggyboy]

That “decoupling” theory was either an outright lie to give people cover to get out of stocks, incredible stupidity, or subconscious subtle America-bashing.

[TigerLikesRooster]

It is a globalist pipe-dream, their wishful version of the world where investors with big money can jump from one country to another, never running out of the opportunity to make big bucks.

I agree that it is an incredible stupidity.