Macroscope | Emerging markets ‘decoupling’ narrative may have some truth to it after all
- The argument that emerging markets were resilient enough to withstand pain in developed economies was debunked following the 2008 financial crisis
- Today, however, leading emerging markets are diverging from their developed peers on monetary policy, and look set to lead the global rate-cutting cycle
One of the most popular narratives in financial markets prior to the 2008 financial crash was “decoupling”. Championed by investors who were bullish on the prospects for emerging markets, the decoupling thesis rested on the premise that developing nations were resilient enough to withstand economic and financial pain in the developed world, mainly because of their strong domestic markets and more prudent macroeconomic policies.
The theory was debunked in the years following the crisis when it became clear that the global economy was far too intertwined through trade and finance for emerging markets to decouple. If anything, stocks in developing nations proved to be a geared play on those in advanced economies: outperforming developed market equities when they were rising and underperforming when they were doing badly.
Over the past decade, a more conspicuous form of decoupling occurred, but not the type emerging market bulls had envisioned. Since January 2013, the MSCI Emerging Markets Index – a gauge of stocks in developing nations – has lost 8.5 per cent. By contrast, the MSCI World Index, which tracks stocks in developed economies, has gained about 110 per cent.
Having priced in rate cuts in the United States later this year as recently as May, bond markets now expect the Federal Reserve to raise rates again this month, and possibly once more before the end of the year.
