Pundits Sell Recoupling Story As Market See-Saws

MUMBAI: Equity market mandarins from Goldman Sachs and Morgan Stanley first proposed the theory of decoupling, an economic state, wherein equity markets exist without correlating itself with other markets or insulated from external factors. The theory was new, zesty and there was no reason why one should not buy the theory.

But as December rolled in with fears of an US slowdown; credit collapse; sub-prime worries and a falling dollar, proponents of the decoupling theory are astutely debunking their claims.

Barely a couple of weeks ago, desi equity analysts were vocal about India decoupling from world markets. Now, with the home market toeing the global line, the decoupling theory appears to be fast losing ground. The new theory is — no market can stay insulated from global pressures.

The need to switch theories took flight when Morgan Stanley chief Stephen Roach recently said: “Decoupling is a good story, but it’s not going to work going forward.” Goldman Sachs economist Peter Berezin coined a new term and said the “Year 2008 will be the year of recoupling”.

“Analysts across the world are not expecting decoupling now. If growth in the US slows down, Japan, Europe and China would be badly hit. If China is hit, it will rock emerging Asian markets Korea, Taiwan, Philippines and Indonesia. India would also be marginally impacted,” said ICICI Bank private banking global research head G Ramachandran.

Of the 38 monitored countries, Goldman economists expect growth to slacken in 26 and strengthen in a dozen economies. This, according to reports, will cause global growth to slowdown from 4.7% to 4% next year.

Deutsche Asset Management’s investment specialist Bill Barbour maintains that there is nothing as decoupling of markets. “Everyone talks about decoupling of the US economy with Asian economies. Now, that’s a remote happening. Even if it does, the US still accounts for a huge amount of growth. If the US slows down, it will impact all other economies,” Mr Barbour says.

“If the US GDP comes down in the range of 1.5% to 1.7%, there is very little chance of decoupling. If the decline is more, every market would be impacted. Decoupling happens in specific zones, it is not across markets phenomenon,” says Credit Suisse Securities’ research head Nilesh Jasani.

In case of sub-prime credit defaults, the initial impact was thought to be only on the US economy. But from what experts feel now, sub-prime credit is more of a high-credit condition, moving across different markets and economies. Essentially, the US accounts for one-third of the world GDP and 14% of the world trade and hence is important.

“The Indian market has a higher integration on account of fund flows. However, despite the US economy slowing down, the world GDP growth has held up nicely above 5%, led by emerging markets and Asian economies.

In the strict sense, emerging markets might not decouple, but will certainly diverge from the American market. This could be one reason why emerging markets have not caught cold, despite the US sneeze,” said Enam Securities’ economist Sachchidanand Shukla.