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May 10,2008
Forget decoupling, the new market buzzword: Recoupling
Forget decoupling. The latest buzzword in global financial markets is recoupling. It argues that the state of the economies across the world is still umbillicaly attached to the US, though Asia is far more insulated than Europe. And within Asia, India with its growth story, is still considered a ‘safe’ haven.LONDON: Forget decoupling. The latest buzzword in global financial markets is recoupling. It argues that the state of the economies across the world is still umbillicaly attached to the US, though Asia is far more insulated than Europe. And within Asia, India with its growth story, is still considered a ~safe~ haven. Doesn~t matter if Uncle Sam~s losing its way a bit there~s plenty of hope and big money still floating in India.

Decoupling, the theory that the rest of the world doesn~t have to catch a cold if the US sneezes, which was all the rage last year, could easily go down as one of the shortestlived buzzwords in economic theory. As economists, analysts, and wealth managers frantically look for explanations to give their clients after the carnage in the Asian markets, a new buzzword has started doing the rounds recoupling.

This one argues that growth economies or no, the the rest of world is still umbilically attached to the state of the US economy, maybe a lot more for Europe and somewhat less for Asia. Goldman Sachs, which with its BRIC reports become some kind of messiah for emerging markets, has now put out an investor note titled Signs of recoupling in Europe. Our view that the US will now fall into recession this year increases the risks to growth in the rest of the world, it says.

This view seems to be reflected in report after report from western economists, wealth managers, analysts, and media commentators, as market reports in Europe are busy writing off the ~myth~ of decoupling. So is it time to start worrying? Not yet. The good news is that a number of economists and Asia watchers believe that Asian economies especially India are still ~safer~ havens in a downswing of the global business cycle.
While Europe may not be able to decouple from an American recession, India, largely driven by domestic growth, is expected to weather any such storms more easily than others. The US is the world~s biggest economy and events there will have a global impact. The business cycle still exists, it hasn~t been abolished in India and China. The direct linkage, via export markets, is much less for India than, say, even China. India will be slightly impacted, but overall the key driver for India will be domestic factors, and what happens in the Indian economy, says Gerard Lyons, Standard Chartered~s chief economist globally.

The bad news is that gloomy global investor sentiment, and more adherents to a recoupling school of thought, could create mood swings in the Sensex. Even here there~s a silver lining; You must remember that this time the retreat was extremely orderly, the processes and systems held up. Even five years ago, a shock like this would have created chaos in the stock markets, points out Sonjoy Chatterjee, director, ICICI Bank.

So what is the argument for recoupling? It goes something like this: US~ problems last year were mostly domestic, based on housing, but as signs of recession deepen, Europe, at least will not be able to escape the ill-effects and will take a hit on domestic growth. The alternative ~growth~ engines of China and India, despite their large domestic consumption, will not be able to fill the gap left by the US. While India may be reasonably shielded from the impact, China~s export-based economy may follow the American drummer.
Stephen Roach, chairman of Morgan Stanley Asia, an adherent of the view that you can~t have both globalisation and decoupling in the same world space, pointed out in his Davos blog that the US consumed over $9.5 trillion in 2007 fully six times the combined consumption totals for China ($1 trillion) and India ($650 billion).

Gerard Lyons believes that happens not to be the case. Insulation, rather than ~decoupling~ is a better way to think of emerging economies and their relationship to events in the US. Importantly, many emerging economies are in a much better position to cope with a US downturn, with much higher reserves, credible macroeconomic policies and more resilient domestic demand.

While economists battle it out, markets, now are another matter entirely. As Robert Prior Wandesforde, senior economist of HSBC says, There~s a distinction to be made between economic and market decoupling. Those arguing that economic decoupling between Asia and the US can~t possibly happen are forgetting that it already has. Markets tend to be more closely related to global developments partly because the companies included are more internationally focused than the overall economies.

Global investor sentiment, battered by fears of a US recession, slowing growth in Europe, fear of US monoline insurers failing, not to mention the strange saga of Societe Generale, is turning somewhat wary of what was considered the ~safe haven~ theory of Asian markets.

The hot money may be withdrawn, but when investors look at fundamentals, we~re still seeing good earnings growth in India. Stocks are trading at around 18-19 times earnings multiples, and if you have a 15% plus growth in annual earnings, one can live with that, says Ian Gomes, global head of KPMG~s Emerging Markets. He also points out that the big crisis in global markets today is liquidity, but there~s no credit squeeze in India, there~s plenty of credit available.

Another fallout of global investors getting jittery about the US is a shift in the focus of sectors while it~s hard to prove, the mood internationally seems to be veering towards sectors based on domestic growth in India and other Asian markets. In its analysis of the Asian market crash, MSCI Barra found that energy was the biggest loser, possibly triggered by fears that a US and global slowdown would reduce energy demand and lower the earnings yield of these stocks.

At the other end of the spectrum, consumer discretionary, consumer staples and information technology were the sectors that had the smallest declines. This is in contrast to earlier sell-offs in which the industries sector was the hardest hit, says MSCI Barra~s research.

However it goes, it looks as if the decoupling versus recoupling debate is unlikely to go away for a while. And will be one debate that will move almost exactly in sync with how markets perform globally.
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