We may all remember the lively debates on decoupling of emerging economy stock markets from the US subprime crisis, which was the focus of the financial media for the most part of 2007 and early 2008. As the equity markets in emerging markets showed southward trend in 2008, these discussions died a natural death.
It may well be a time to restart the same discussions, albeit with a weird twist. Readers may have a look at the chart below:
In the last one year, emerging markets, such as Brazil and India, handed investors returns similar to Italy. Even beleaguered Spain did much better. For a dollar based investor, the only markets with positive returns were Japan and the Nasdaq.
The time has come to have a hard relook at the investment thesis for emerging economies. In spite of all the growth promise they hold, these economies depend on foreign inflows, asset & currency valuations which correlate strongly with changes in risk appetite in the global markets. In short, to make money in emerging markets, what matters is the “risk-on” attitude, and not real growth.
Also, it is possible that the emerging market performance shows the ill-placed exhuberance showed by some large emerging market companies in M&A space in late 2000s, when the corporates in developed world were busy conserving cash to prepare for possible slowdown.