Over the last couple of months I have had a conversation with several people where they have been of the view that the decoupling theory has not worked and how everything has fallen as the US has fallen and the global recession is impacting everyone similarly.
I have a different view on this subject. Yes I agree that the global markets and economies cannot be totally decoupled mainly due to the impacts of globalization and financial fund flow linkages all over the world. As such on a day to day and month to month basis most financial markets are linked to each other. Anecdotal evidence of the same in the recent past has been
-Most global markets are down 30-40% over the last one year
-Most global markets are up 25-35% over the last one month
-Credit spreads all over the globe went up together from September 2008 to December 2008 and have subsequently come down together. For example the spread of 10 year corporate bonds over Govt. of India securities that had gone upto 400 basis points is now down to around 170 basis points which is the same as what was there in September 2008.
However there is a clear decoupling which has happened over a period of time. Since the beginning of the global bull market in the year 2003 till date (which is post the correction of the bull move) the following are the statistics for various markets for this period (absolute in percentage) –
Market March 2003-Till Date …….. Last one year
US (Dow Jones) +1…………………………………….. -36
UK (FTSE) +10………………………………………….. -33
Japan(Nikkei) +12……………………………………… -31
China (HSCEI) +62…………………………………….. -32
HK (H S I) +73……………………………………………..-38
Germany (DAX) +85………………………………….. -33
Korea (Kospi) +149…………………………………….. -25
India (Sensex) +254…………………………………… -32
Brazil (IBOV) +303…………………………………….. -28
(The Chinese markets had a big rally of nearly 2000% in the decade of the 1990’s and finished their correction in 2005 unlike other markets which corrected by the end of 2002)
The first column of the above table clearly shows that over a six year period returns from all prominent global markets have been very different, however over one year the fall is more or less similar.
Similarly if one looks at valuations of most global markets as per consensus estimates of today , they trade in a range of 9-12 times earnings of 2010. As such in terms of valuations also today most markets are well aligned.
Market P/E Ratio for current year.. P/E Ratio for next year
US (Dow Jones) 21……………………………………… 12
UK (FTSE) 11…………………………………………….. 9
Germany (DAX) 12…………………………………….. 10
Brazil (IBOV) 11…………………………………………. 8
India (Sensex) 13…………………………………………11
China (HSCEI) 12…………………………………………11
HK (H S I) 14…………………………………………….. 12
Korea (Kospi) 13…………………………………………. 11
Singapore (Straits) 12 …………………………………………….10
Essentially what this means in my view is that markets where the economies recover faster and companies do better in terms of earnings than the consensus forecasts of today will do much better than markets where there is disappointment in earnings. Today a valuation convergence based on estimated earnings has happened in most markets and as the recovery process gathers steam over the next few quarters there will again be a wide divergence in performance of different markets over the next five years.
Broadly it will imply a very strong upmove in the markets of economies with growth higher than global growth
The other key factors which will determine the direction of markets will be the movement of currencies on a relative basis. Countries whose currencies do better will see their markets also doing better on a relative basis as most investors would like to invest in countries with appreciating local currencies as that gives them more profits in their own currencies.
Therefore in my view decoupling is a reality, but for patient and long term investors.