In 2007, faith in “decoupling” – the notion that emerging stockmarkets and economies could shrug off a sharp US slowdown –was a mainstay for world markets. But since world markets peaked in late October, the Bric markets (Brazil, Russia, India and China) have declined by over 22%, while the S&P is down by less then 15%.
Emerging markets overall have lost around 15% this year, while the S&P is down about 9%. So it seems emerging stockmarkets are still closely correlated with their developed counterparts, while investors are realising that “US weakness is likely to persist and that everybody will be affected in one way or another”, as Gabriel Stein of Lombard Street Research told the FT.
As Citigroup notes, much intra-Asian trade consists of goods assembled in Asia, but ultimately consumed in the developed world; this means 61% of Asian exports end up in Japan, Europe and the US. Overall, exports comprised 55% of Asia-ex-Japan GDP last year, up from 40% in 2001.
Meanwhile, says Stephen Roach of Morgan Stanley, America is a $9trn economy and China and India are respectively worth $1trn and $650bn. “They are not yet at the stage where they can fill the void left by an over-indebted US.” According to Yu Yongding of China’s Institute of World Economics, “if there is weakness in the world economy” the impact on China will be “very serious”. In Singapore, which is among the Asian economies most exposed to America, fourth quarter GDP shrank, while exports to the US are down 11% over the past year. Now demand from Europe appears to be flagging, says The Economist.
With markets “recoupling” as investors lose confidence in the emerging world’s invulnerability, are there any safe havens? One relatively resilient corner of the emerging world has been the Middle East, with the MSCI GCC index of regional equity markets ploughing ahead until last week’s slump. It is only marginally down since the start of the year, while Kuwait is the best-performing market so far in 2008, with a gain of 6.3%; Jordan, Oman and Abu Dhabi are also in the top ten.
Helped by high oil prices, the economies are in sound shape, with investment in infrastructure booming, budgets and current accounts in surplus, while more money is being recycled into economies than in the past. This should help them diversify, says Nick Price of Fidelity. The region is well placed to weather a US recession, says Marios Maratheftis of Standard Chartered, while a drop in the oil price should be manageable, according to SABB’s John Sfakianakis. “Budgets for this year in the big economies like the United Arab Emirates and Saudi Arabia are based on $45-$48 oil,” he says.
Fund group T. Rowe Price says that while global markets are on average 70% correlated with the S&P 500, the figure for Middle Eastern markets is just 10% – implying that it should be far less affected by jitters on Wall Street than other emerging markets.
But there are few ways for retail investors to access these small and illiquid markets. Bahrain-based Sico Asset Management’s regional funds require a minimum investment of $100,000. JP Morgan Fleming’s offshore Middle East Equity fund offers some access, but is heavily skewed towards Turkey. And Fidelity has just launched an onshore version of its offshore Emerging Europe, Middle East and Africa fund, which is biased towards South Africa and Russia.